Pro Forma EPS

Instead of a stock deal, Bellcross Corp acquires Fenwick Ltd (net income $20M) for $150 million in cash, financed entirely with new debt at a 6% interest rate. Bellcross's tax rate is 25%, its share count stays at 40 million (no new shares issued), and its own net income is $80 million. What is the pro forma EPS, and is the deal accretive or dilutive?

1. A.$2.50 EPS; accretiveWrong. This ignores the new after-tax interest expense on the debt used to fund the deal.
2. B.$1.86 EPS; dilutiveWrong. This does not correctly combine net income, interest cost and the unchanged share count.
3. C.$2.33 EPS; accretiveCorrect. ($80M + $20M − $6.75M) ÷ 40M ≈ $2.33, above the $2.00 standalone EPS.
4. D.$2.33 EPS; dilutiveWrong. The EPS figure is correct, but $2.33 is above the $2.00 standalone EPS, which makes the deal accretive, not dilutive.

Why: After-tax interest cost on the new debt = $150M × 6% × (1 − 0.25) = $6.75M. Combined net income = $80M + $20M − $6.75M = $93.25M. Since no new shares are issued in a cash deal, pro forma EPS = $93.25M ÷ 40M ≈ $2.33, above the $2.00 standalone EPS — the deal is accretive, because Fenwick's earnings yield ($20M ÷ $150M ≈ 13.3%) exceeds the after-tax cost of the debt used to fund the deal (4.5%).

Bellcross Corp (net income $80M, 40M shares, standalone EPS $2.00) acquires fictional target Fenwick Ltd (net income $20M, 10M shares) in an all-stock deal at an exchange ratio of 0.5 Bellcross shares per Fenwick share, with no synergies assumed. What is the pro forma EPS, and is the deal accretive or dilutive?

1. A.$2.50 EPS; accretiveWrong. This divides combined net income by the original 40M shares, ignoring the 5M newly issued shares.
2. B.$1.82 EPS; dilutiveWrong. This does not correctly apply the combined net income and pro forma share count.
3. C.$2.22 EPS; accretiveCorrect. $100M ÷ 45M ≈ $2.22, above the $2.00 standalone EPS, so the deal is accretive.
4. D.$2.00 EPS; neutralWrong. Combining the two companies' earnings and shares does move EPS; it does not leave it unchanged.

Why: New shares issued = 10M Fenwick shares × 0.5 exchange ratio = 5M shares. Pro forma shares = 40M + 5M = 45M. Combined net income (no synergies) = $80M + $20M = $100M. Pro forma EPS = $100M ÷ 45M ≈ $2.22, which is above Bellcross's $2.00 standalone EPS — the deal is accretive.

Bellcross Corp (net income $80M, 40M shares, share price $30) acquires Fenwick Ltd (net income $20M) for total consideration of $180 million: 60% cash, financed entirely with new debt at 6% (Bellcross's tax rate is 25%), and 40% newly issued Bellcross stock. What is the pro forma EPS?

1. A.$2.00Wrong. This simply restates Bellcross's standalone EPS without incorporating the transaction at all.
2. B.$2.36Wrong. This omits the after-tax interest charge on the debt-financed cash portion.
3. C.$1.91Wrong. This applies the after-tax interest charge to the full $180 million instead of only the $108 million cash/debt-financed portion.
4. D.$2.24Correct. ($80M + $20M − $4.86M) ÷ 42.4M ≈ $2.24.

Why: Cash portion = $180M × 60% = $108M, financed with debt; after-tax interest = $108M × 6% × 0.75 = $4.86M. Stock portion = $180M × 40% = $72M ÷ $30 share price = 2.4M new shares. Combined net income = $80M + $20M − $4.86M = $95.14M. Pro forma shares = 40M + 2.4M = 42.4M. Pro forma EPS = $95.14M ÷ 42.4M ≈ $2.24.