“The accretion / dilution model really helped me better understand the effect on earnings after an acquisition and how both equity and debt impact a purchase.”

Accretion / Dilution Analysis Module

In the Accretion / Dilution Analysis Module, trainees learn how to calculate whether an acquisition will increase or decrease a Company”™s immediate earnings. Trainees learn the effect that capital structure (specifically the amount of debt used to acquire the target) has on the pro forma earnings. Additionally, trainees create a sensitivity analysis using a data table to determine a range of accretive and dilutive scenarios based on certain acquisition metrics such as purchase price premium and debt percentage.

The Accretion / Dilution Analysis Module is designed for trainees who have already participated in our Financial Modeling Course. This module typically lasts one to two hours. This module enables trainees to learn how to build a unit level start-up model from scratch, determine how to calculate funding needs, build an equity returns profile and perform sensitivity testing.

Module Description

Trainees receive a 1-tab blank spreadsheet, which they copy into the financial model they have built in the Financial Modeling Course.   The target company for the accretion / dilution analysis will be the same company used in financial model.   It is assumed that the acquirer will be another company of equal or greater size than that of the target. During this module trainees:

  • Determine the appropriate acquisition premium and resulting transaction value of the target
  • Calculate the total number of diluted shares outstanding using the Treasury Stock Method
  • Build a sources and uses of funds table and determine an appropriate capitalization strategy (% debt vs. equity)
  • Determine the aggregate equity value of the acquirer and new shares issued
  • Determine the resulting incremental debt and interest expense based on new debt issued
  • Calculate pro forma EPS and resulting accretion / dilution
  • Build a sensitivity table which determines the level of accretion or dilution based on various metrics, such as stock price premium and debt percentage