Which factor can make an acquisition dilutive beyond foregone cash interest?

Which factor can make an acquisition dilutive beyond foregone cash interest?

• A. Amortization of intangible assets
• B. Tax rate
• C. Market risk
• D. Currency exchange

Answer: (A)

The key idea is that when you acquire another company, you allocate part of the purchase price to identifiable intangible assets (like customer relationships, brand, technology) and you must amortize those assets over their finite lives. This amortization creates a recurring non-cash expense that reduces pre-tax income, which lowers net income after tax and can reduce earnings per share (EPS) even more than the effect of not paying cash interest on financing. In other words, the annual amortization bite can make the deal more dilutive than the savings from avoiding cash interest. Tax rate affects how much of that amortization’s impact is felt after tax, but it doesn’t by itself introduce the same predictable, recurring earnings drag. Market risk and currency exchange influence risk and value, not the direct non-cash earnings deduction from purchase price allocation.

The key idea is that when you acquire another company, you allocate part of the purchase price to identifiable intangible assets (like customer relationships, brand, technology) and you must amortize those assets over their finite lives. This amortization creates a recurring non-cash expense that reduces pre-tax income, which lowers net income after tax and can reduce earnings per share (EPS) even more than the effect of not paying cash interest on financing. In other words, the annual amortization bite can make the deal more dilutive than the savings from avoiding cash interest.

Tax rate affects how much of that amortization’s impact is felt after tax, but it doesn’t by itself introduce the same predictable, recurring earnings drag. Market risk and currency exchange influence risk and value, not the direct non-cash earnings deduction from purchase price allocation.