An accretive merger is expected to do what to earnings per share?

• A. Decrease EPS
• B. Increase EPS
• C. Have no effect on EPS
• D. Make EPS unpredictable

Answer: (B)

An accretive merger is about EPS rising after the deal. EPS, or earnings per share, is net income divided by shares outstanding. When two companies combine, the total net income can grow due to synergies, cost savings, and higher scale, and if this incremental earnings grows faster than the number of new shares issued (or the debt taken on and its interest reduces income), the result is a higher EPS.

For example, if the pre-merger firm has 50 million shares and earns $100 million (EPS of $2), and the merger adds $50 million of incremental earnings while 10 million new shares are issued, total earnings become $150 million and 60 million shares are outstanding, giving an EPS of $2.50. This increase shows the deal is accretive.

If the additional shares or debt dilute earnings more than the incremental gains, EPS would fall, which would be dilutive, not accretive. Thus, an accretive merger is one that increases EPS.