Describe accretion and dilution in the context of mergers and acquisitions.

• A. Debt adjustments determine accretion or dilution.
• B. EPS tends to fall after merger regardless of anything.
• C. Accretion means ROE rises post-transaction; dilution means ROE falls.
• D. Accretion means EPS rises post-transaction; dilution means EPS falls; driven by price, financing, and expected synergies.

Answer: (D)

Accretion and dilution describe whether the combined company’s earnings per share (EPS) go up or down after a merger or acquisition. The key idea is to compare the post-transaction EPS to the acquirer’s standalone EPS. If the EPS of the merged entity is higher, the deal is accretive; if it’s lower, the deal is dilutive.

What drives that outcome are three main forces: the price paid for the target, how the deal is financed, and the expected synergies. The purchase price affects how many new shares may be issued or how much debt is taken on, which in turn changes the denominator (shares outstanding) and the interest expense or dilution of existing shareholders. Financing mix matters because issuing stock can dilute earnings per share, while taking on debt increases interest costs but may avoid issuing new shares. Expected synergies—cost savings and revenue enhancements—raise post-merger earnings and can push an otherwise neutral or dilutive deal toward accretion.

ROE is not the standard measure here; accretion/dilution is about EPS, not return on equity. See how price, financing, and synergies shape whether the combined EPS rises or falls.