Accretion/dilution questions show up constantly in investment banking and corporate development interviews, and interviewers expect a structured, step-by-step answer rather than a memorized rule of thumb. Here's the approach that holds up whether the question is a quick conceptual check or a full modeling exercise.
Step 1: Get the purchase price right first
Before touching net income or EPS, nail down the offer price per share and the total equity purchase price: offer price = target's standalone share price × (1 + premium), and purchase price = offer price × target shares outstanding. Interviewers will sometimes bury the premium inside a dollar offer price rather than a percentage — read the prompt carefully before you start calculating.
Step 2: Know the acquirer's standalone EPS as your benchmark
Every pro forma number you calculate afterward gets compared back to this one figure — acquirer net income divided by acquirer shares outstanding. Say it out loud before moving on; it's easy to lose track of the baseline once the arithmetic gets busier.
Step 3: Separate the cash and stock mechanics — don't blend them by accident
This is the most common place candidates lose points. In an all-cash deal, the purchase price is funded with new debt (or existing cash), which means an after-tax interest expense enters the combined net income, but the acquirer's share count doesn't change. In an all-stock deal, it's the reverse: new shares get issued (equity purchase price ÷ acquirer share price), so the share count grows, but no interest expense enters the income statement at all. Mixing these up — adding interest expense in a stock deal, or forgetting to add new shares in a stock deal — is the single most common accretion/dilution mistake in interviews.
Full Accretion/Dilution Analysis walks through both structures side by side with full numbers, which is the clearest way to see exactly where the two calculations diverge.
Step 4: Use the quick mental-math shortcut to sanity-check your answer
For a stock deal, compare the transaction P/E (purchase price ÷ target net income) to the acquirer's own trading P/E — paying a higher multiple than you trade at is usually dilutive. For a cash deal, compare the target's earnings yield (target net income ÷ purchase price) to the after-tax cost of the debt used to fund it — financing that costs more than the earnings yield it buys is dilutive. Running this check before you finish the full calculation lets you sanity-check your own arithmetic, and it's exactly the kind of shortcut interviewers want to see you reach for.
Step 5: If the deal is dilutive, solve for the synergy break-even
Don't stop at "it's dilutive" — an interviewer will almost always ask what it would take to fix that. Set pro forma net income equal to standalone EPS × pro forma share count, solve for the net income gap versus your calculated pro forma net income, and tax-affect that gap to get the pre-tax synergies required. This is the calculation most candidates skip, and it's usually the one that separates a pass from a strong pass.
A note on share count precision
In a real model, "shares outstanding" almost never means the basic share count — options, RSUs, and convertible securities all affect the fully diluted count differently depending on the acquirer's share price. Dilution Deep Dive covers the treasury stock method and if-converted method in detail, which matters once you move past the simplified version of this analysis. And if the deal is cash-funded, Purchase Price Allocation (PPA) covers the goodwill and amortization consequences that follow once the purchase price is finalized — a natural next step once the EPS impact is settled.