An acquisition is dilutive when which of the following is true?

An acquisition is dilutive when which of the following is true?

• A. The seller contributes more net income than the buyer foregoes interest on cash and debt
• B. The additional net income from the seller does not offset foregone interest on cash, debt interest, and any issued shares
• C. Dilution only occurs if there is no debt
• D. Dilution is impossible with stock deals

Answer: (D)

The main idea is how to determine whether an acquisition lowers the buyer’s earnings per share (EPS). An acquisition is dilutive when the post-deal EPS is lower than the pre-deal EPS. That happens when the incremental net income from the acquired seller isn’t enough to cover the costs introduced by the deal—the foregone interest on cash or debt financing and any new shares issued to fund the purchase. So the best way to express dilution is that the additional net income from the seller does not offset foregone interest on cash, debt interest, and any issued shares. If those financing costs and dilution outweigh the seller’s extra earnings, EPS falls and the deal is dilutive. It’s worth noting why the other ideas aren’t correct: if the seller’s added net income exceeded those costs, the deal would be accretive, not dilutive. Dilution can occur with debt financing or with stock financing, so saying dilution is impossible with stock deals isn’t accurate.

The main idea is how to determine whether an acquisition lowers the buyer’s earnings per share (EPS). An acquisition is dilutive when the post-deal EPS is lower than the pre-deal EPS. That happens when the incremental net income from the acquired seller isn’t enough to cover the costs introduced by the deal—the foregone interest on cash or debt financing and any new shares issued to fund the purchase.

So the best way to express dilution is that the additional net income from the seller does not offset foregone interest on cash, debt interest, and any issued shares. If those financing costs and dilution outweigh the seller’s extra earnings, EPS falls and the deal is dilutive.

It’s worth noting why the other ideas aren’t correct: if the seller’s added net income exceeded those costs, the deal would be accretive, not dilutive. Dilution can occur with debt financing or with stock financing, so saying dilution is impossible with stock deals isn’t accurate.