In this workout, Oslo has acquired 100% of Bergen financed with 50% debt and 50% equity We're asked to calculate the accretion or dilution to EPS for the transaction and pre tax synergies have to achieve in order to achieve EPS accretion or dilution neutrality Okay so having a look through, we've got some information provided for Oslo. That get's us down to Oslo's net income And then for Bergen's net income We'll then put the acquirer and target's net income together Then work out any transaction effects and then work out the consolidated shares, that will then get us our consolidated proforma EPS We can then work out accretion or dilution So we start out by working out Oslo's net income and that's going to be Oslo's EPS times by Oslo's diluted shares outstanding, 18,287.4 We now need to do something similar for Bergen but we need to some extra information along the way So let's do that as well We firstly work out the purchase price for a share, I've got the current share price of 133 And I multiply that by one plus the offer premium being offered (35%) So the purchase price is 179.55 The equity purchase price is the share purchase price times by the diluted shares outstanding 46,683 The debt financing is one minus the equity financing, so 50% 50% And lastly we get that net income, and that was the EPS times by the diluted shares outstanding So this gives us all the information that we need for the rest of the question So let's go back to working out the top line of that EPS (that net income) So my combo net income is the sum of the acquirer's net income and the target's net income Now were there any transaction effects? Well because we're going to be partly debt financed, that means we're going to have some interest as well So in order to work out that interest, I'm going to take the 50% of debt financing Times by the equity purchase price So that will get me the debt financing, I now times that by the interest rate which was 5% But we know that interest is tax deductible so I can times that by one minus my marginal tax rate Because this is having a marginal effect on my net income And I want all of that to be a negative so I times that by minus 1 which gets me to 817 of interest Fantastic! So my proforma net income is acquirer plus targets net income less the post tax interest on debt 22,800.4 Now we need to work out the number of shares that we're going to have post deal We start off with the acquirer shares and then we have to add on any shares the acquirer issues because of the deal Well we know that the deal is going to be 50% of equity finance, so some shares are going to be issued So I workout 50% of the equity purchase price That gets me the equity issuance but I now divide that by the acquirer's share price to work out how many shares they issued They issued 416.8 So the proforma shares outstanding comes to 1,872.8 Now let's work out that proforma EPS, that's your proforma net income, divided by proforma number of shares Great! 12.17, however I can see that the EPS pre deal was 12.56. Oh dear it's gone down, so we've had EPS dilution So 12.17 divide that by the 12.56 (minus 1) EPS dilution of 3.1% So we now need to workout the synergies in order to break even So I start off with the proforma EPS, I compare that to the acquirer EPS of 12.56 And we can see the EPS shortfall is 0.39 That translates into a net income shortfall of the EPS times by the proforma shares Net income shortfall 722.1 You might think "Great, that's the synergies we need" but hang on this is post tax and my synergies are on pre tax So I need to take the 722.1 and divide that by one minus my marginal tax rate, because again it's making a marginal impact on my net income There we go! Pre tax synergies for EPS neutrality 1,031.6 Alternatively I could have used my formula to do that, which is the maximum of acquirer EPS minus proforma EPS Times by the proforma shares outstanding All divided by of one minus that marginal tax It should get me to exactly the same figure and it does