In this workout we're told Gardermoen has acquired 100% of Fornebu financed with debt only We're asked to calculate EPS accretion or dilution for the transaction and try and work out whether the deal will be a success So we start off by working out the equity purchase price for Fornebu and I can see that the current share price is 18 But a premium is being paid of 25% So our offer share price is 25% above the 18, I then multiply that by the shares that they've got 5,625 is our equity price We know it's going to be 100% debt financed And I can now work out the net income of both Gardermoen and Forenebu I do that by taking their shares outstanding times by the earnings per share So total net income for each of the companies stand alone given there So how am I now going to workout the proforma EPS i.e. for the consolidated company Well I'll start by taking the acquirer's net income plus Fornebu's net income plus any transaction effects such as synergies etc So we're going to start doing that in the next section underneath So my combo net income (the two companies) Stand alone, no adjustments to their net income, add them together gets me 1,582 I now go into any transaction effects and we have some synergies, the synergies were 50 (that means net income is going to go up) But hang on, it does need to be taxed. So I multiply that by one minus the tax rate With the marginal tax rate here because our SG&A synergies mean that our net income only goes up by a marginal amount Post tax synergies increase net income by 35 However remember it was debt finance this deal, so that means that there's going to be some interest on that debt So our debt financing is 100% multiplied by the equity purchase price I then need to multiply that by the interest on the acquisition debt Luckily that cost is going to be reduced by tax saving, so I times that by one minus again the marginal tax rate Lastly this is going to be a subtraction to my net income So I'm going to times it by minus one so it comes out as a negative. And it comes out as negative 196.9 Add those three items together and that gets me my proforma net income of 1,420.1 Great! In order to get my proforma EPS, I'll take that proforma net income and divide it by proforma number of shares So that's our next thing, we need to start with our acquirer's shares outstanding pre deal which was 600 And then add on any new shares issued If there's been any equity issuance, well that's going to increase the number of shares the acquirer has In this case It was equity financed 0% But we'll still do the calculation anyway, it was 0% multiplied by the equity purchase price, divide that by the acquirer's share price of 30 And that will get our number of new shares issued in the transaction In this case 0. So our proforma shares outstanding is just the 600 outstanding plus the zero gives us 600 We'll finally in a position to calculate that proforma EPS So I grab the proforma net income divide it by proforma number of shares gets me 2.37 I now need to compare that to the EPS pre deal of the acquirer So take that 2.37 and let's divide it by the acquirer's EPS pre deal So subtract one, I'm hoping it's going to be a positive, I'm hoping EPS will have gone up and there will be an accretion Yes there is! 14.3 This is a good sign that the merger is going to be a success