Every concept, endless questions
Each concept is a small financial model. Read how it works, then draw a real interview question from it: forwards, backwards or what-if, with fresh numbers and a worked solution every time.
Forward runs a concept the usual way. Inverse runs it backwards, which is what separates understanding from memorizing.
Accretion / Dilution
5 conceptsEPS accretion / dilution in a mixed-consideration deal
Pro forma EPS = (combined net income + after-tax synergies − after-tax financing cost) ÷ (acquirer shares + new shares issued). Cash costs you foregone interest, debt costs you interest expense, stock costs you share count. The deal is accretive when what you buy in earnings outruns what you give up in earnings and shares.
Breakeven P/E and the cash-versus-stock rule
Every form of consideration has a cost expressed as a yield. Paying in stock costs the acquirer its own earnings yield — one over its P/E — because every new share carries a claim on existing earnings. Paying in cash or debt costs the after-tax interest rate. What you buy is the target’s earnings yield at the purchase price — one over the P/E you actually pay, premium included. A deal is accretive when the yield bought exceeds the yield paid. For stock that reduces to: acquirer P/E above the purchase P/E. For cash: purchase P/E below one over the after-tax cost of funds.
Purchase accounting: goodwill and asset step-up
When an acquirer buys a company, it records the target’s assets at fair value, not book. Anything it paid above that fair value is goodwill: the price of relationships, brand and expected synergies that no asset line captures. Writing assets up creates a wrinkle: in a stock purchase the tax authority still sees the old basis, so the higher book value will produce depreciation the company cannot deduct. That future tax cost is booked today as a deferred tax liability — and because the net assets acquired are worth less by that amount, goodwill rises to fill the gap.
Synergy phasing and costs to achieve
Synergies are announced as a run-rate — the annual saving once everything is done — but they arrive gradually, and getting them costs money up front: severance, system migrations, lease exits. So year one usually shows a fraction of the run-rate, offset by most of the one-off costs, and can be a net drag. The market values the run-rate, after tax, at the acquirer’s multiple; the accretion math has to use each year’s phased, after-cost figure instead.
Contribution analysis
In a stock deal both sets of shareholders end up owning the combined company. Contribution analysis asks a simple fairness question: what share of the combined revenue, EBITDA and net income does each side bring, and what share of the combined equity does each side get? If the target contributes a fifth of the earnings but its holders receive a third of the shares, the acquirer is paying up — and the analysis shows exactly what offer value would have matched contribution to ownership. Different metrics give different answers because leverage and margins differ; the spread between them is itself informative.