Series 79 practice questioneasyAccretion and Dilution Analysis
Why can a stock-for-stock acquisition be dilutive even when the target is growing quickly?
- AStock consideration removes all purchase accounting effects
- BSynergies are prohibited in stock deals
- CA stock deal cannot use fairness opinions
- DThe buyer may issue more shares than the target’s earnings contribution justifies on a per-share basis✓ Correct answer
Explanation
Why D — The buyer may issue more shares than the target’s earnings contribution justifies on a per-share basis
The buyer may issue more shares than the target’s earnings contribution justifies on a per-share basis Accretion and dilution depend on the relative earnings yield of what is bought versus what is issued. If the buyer issues expensive stock for a lower earnings yield target, the deal can be dilutive absent synergies or other offsets.
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