Accretion/Dilution Practice Questions and Answers

Accretion/dilution questions test whether you understand why an acquirer's earnings per share moves after a deal, not whether you can build a full merger model from memory. Interviewers usually raise it as a follow-up inside a broader M&A discussion: compare two companies' P/E ratios, propose a financing mix, and ask whether the deal is accretive or dilutive. This page is the practice set. For the underlying method, see accretion/dilution analysis; here you'll drill the arithmetic against ten fresh prompts plus three local reps.

TL;DR

• Accretive means acquirer EPS rises after the deal; dilutive means it falls.
• The P/E Flip Rule: an all-stock deal is accretive when the acquirer's P/E is higher than the target's.
• Debt financing is accretive whenever the target's earnings yield beats the after-tax cost of debt.
• Ten prompts below cover stock deals, debt deals, and the synergy breakeven question.
• The local pack checks the combined-EPS arithmetic that trips candidates under time pressure.

What is the P/E Flip Rule?

The P/E Flip Rule is a fast directional check for stock-for-stock deals: if the acquirer trades at a higher P/E than the target, issuing acquirer stock to buy the target is accretive, because the acquirer is "buying" the target's earnings more cheaply than the market prices its own. If the acquirer's P/E is lower than the target's, the same deal is dilutive.

1. Compare P/E ratios. Acquirer P/E versus target P/E, both pre-deal.
2. Higher acquirer P/E, all-stock: accretive, before synergies.
3. Lower acquirer P/E, all-stock: dilutive, before synergies.
4. Switch to debt or cash financing: compare the target's earnings yield (inverse of its P/E) to the after-tax cost of the acquirer's debt instead.
5. Add synergies last. Synergies can flip a marginally dilutive deal to accretive, but don't use them to explain away a structurally dilutive one.

Worked example: an all-stock deal

Prompt: Acquirer trades at 15x earnings with net income of 200 and 100 million shares outstanding. Target trades at 20x earnings with net income of 50 and 25 million shares outstanding. The acquirer pays a 20% premium to the target's current price, funded entirely in new acquirer stock, with no synergies.

Acquirer EPS pre-deal:

$$\text{Acquirer EPS}=\frac{200}{100}=2.00$$

Target's per-share price is its P/E times its EPS: 20 times (50 divided by 25), or 40.00. With a 20% premium, the offer price is 48.00 per target share. The acquirer issues new shares worth the total deal value, 48.00 times 25 million shares, or 1,200, at the acquirer's own share price. The acquirer's pre-deal share price is 15 times its EPS of 2.00, or 30.00, so it issues 1,200 divided by 30.00, or 40 million new shares.

$$\text{Combined EPS}=\frac{200+50}{100+40}=\frac{250}{140}\approx1.79$$

Combined EPS of 1.79 is below the acquirer's standalone 2.00, so the deal is dilutive before synergies, even though the acquirer's P/E (15x) is lower than the target's (20x) here, which matches the P/E Flip Rule's direction: paying a premium on top of a lower-P/E acquirer buying a higher-P/E target makes dilution worse, not better.

Practice inside this guide

Accretion and dilution

Question 1 of 3

A buyer earns $220 million on 96 million shares and issues 24 million shares to buy a target earning $20 million. What is pro forma EPS?

Your answer

$/share

Check answer

The pack checks combined-EPS and diluted-share arithmetic in isolation. Reset the exercise above with your own numbers to confirm you can rebuild the full bridge without the walkthrough.

Ten more accretion/dilution prompts to practice

1. Acquirer P/E 18x, target P/E 12x, all-stock, no premium, no synergies. Accretive or dilutive? Accretive, since the acquirer's P/E is higher than the target's.
2. Same deal, but the acquirer pays a 30% premium. Does the direction change? A large enough premium can turn an otherwise accretive stock deal dilutive, because more acquirer shares must be issued to fund the premium.
3. Acquirer funds the deal entirely in cash from the balance sheet, no new debt. How do you assess accretion? Compare the target's earnings yield to the return the acquirer's cash was otherwise earning; if the target's earnings yield is higher, the deal is accretive.
4. Acquirer funds the deal with new debt at 6% after-tax cost; target's earnings yield is 8%. Accretive or dilutive? Accretive, since the target's earnings yield exceeds the after-tax cost of the new debt.
5. Same debt deal, but the acquirer's after-tax cost of debt rises to 9%. What changes? The deal turns dilutive, since the cost of the new debt now exceeds the target's earnings yield.
6. A stock deal is marginally dilutive by 2% on a standalone basis. What synergy level, roughly, would make it breakeven?** Enough after-tax synergies to add back that 2% gap in combined net income; state the required synergy as a percentage of combined earnings, not a guessed dollar figure.
7. The target has convertible debt that becomes dilutive at the new deal price. What do you need to add to the share count? Use the treasury stock method or as-converted shares depending on which is more dilutive, consistent with diluted share count conventions.
8. The acquirer is buying a private target with no public P/E. How do you frame accretion/dilution? Use an implied multiple from the transaction price and the target's earnings, then compare that implied multiple to the acquirer's own trading multiple.
9. An interviewer asks why EPS accretion alone doesn't prove a deal creates value. What's the answer? EPS accretion ignores the premium paid, the risk of the target's earnings, and the cost of capital used to fund the deal; a deal can be accretive and still destroy value if it overpays.
10. A stock deal is accretive on year one, but dilutive by year three as synergies fade. How do you frame that for an interviewer?** Show the accretion/dilution trend across years, not just the entry year, and explain what synergy assumption is driving the later reversal.
11. The acquirer uses a collar structure so the exact number of shares issued depends on its stock price at closing. How does that complicate the accretion math? You can no longer assume a fixed share count; run the accretion/dilution test across the collar's price range to see whether the direction changes at either end.
12. An interviewer asks whether a deal's accretion depends on the acquirer's tax rate. What's the answer? Yes, for debt or cash deals, since the after-tax cost of debt used in the comparison depends on the acquirer's marginal tax rate; a lower tax rate raises the after-tax cost of debt and makes accretion harder to achieve.

What to practice next

More reps like these live in the drills library, filtered to M&A and accretion. For deal structuring beyond the EPS math, see accretion/dilution analysis and enterprise value vs equity value for the valuation inputs feeding the offer price. When a prompt adds synergies, the revenue vs cost synergies guide covers how each type reaches pro forma net income.

Financing method and the accretion test

Frequently Asked Questions

Is an accretive deal always a good deal?

No. Accretion measures the EPS mechanics of the financing and the premium paid, not whether the acquirer overpaid or whether the target's earnings are sustainable. A deal can be accretive and still be a poor use of capital.

What's the fastest mental check in an interview?

For an all-stock deal, compare P/E ratios first; for a debt or cash deal, compare the target's earnings yield to the after-tax cost of the funding. Both are quick, defensible starting points before you build the full combined-EPS bridge.

How do synergies fit into the calculation?

Add expected synergies, net of integration costs and taxed appropriately, to combined net income after you've established the pre-synergy direction. Don't lead with synergies to justify a deal that is dilutive on its own economics.

Does the premium paid matter?

Yes. A higher premium requires issuing more acquirer shares (in a stock deal) or more debt or cash (in other structures), which pushes the deal toward dilution even when the underlying P/E or earnings-yield comparison favors accretion.

What if I'm given net income instead of EPS?

Divide net income by shares outstanding to get EPS for each company, then proceed with the same combined-EPS bridge. Don't skip straight to comparing net income totals, since share count differences change the per-share result.

How is this different from a full merger model?

A full model builds pro forma financials, financing costs, tax adjustments, and a multi-year projection. The interview version isolates the accretion/dilution mechanics: P/E or earnings-yield comparison, share issuance or debt cost, and the combined EPS bridge.

Sources

• Finbound: accretion/dilution interview questions guide (checked September 2026).
• IB Interview Questions: accretion/dilution analysis guide (checked September 2026).
• Wall Street Oasis: accretion/dilution interview question (checked September 2026).