What is a key reason an acquisition may be dilutive?

• A. The buyer's additional shares reduce net income
• B. The seller's contribution fails to offset the buyer's forgone interest
• C. The buyer’s interest on cash exceeds the seller’s contribution
• D. The combined financial statements increase overall debt

Answer: (B)

An acquisition may be considered dilutive primarily when the seller's contribution fails to offset the buyer's forgone interest. In this context, when a buyer acquires another company, they often use cash or debt to finance the acquisition. If the returns or contributions from the acquired company do not exceed the costs or interest expenses associated with financing, this can lead to a situation where the net income of the combined entity does not increase proportionally to the number of shares outstanding.

In practical terms, if a buyer uses cash that could have otherwise earned interest or used funds to enhance operational efficiency, the opportunity cost of that capital must be taken into account. If the acquired company's earnings are less than what the buyer would have earned from the cash or investments, this shortfall can lead to a dilution of earnings per share (EPS). This occurs because the increase in equity (by issuing new shares or reducing available earnings) does not result in a proportional increase in net income.

While other options might touch on relevant aspects of acquisition effects on financial metrics, the specific approach of considering how the seller’s contribution relates to the buyer's forgone financial benefits is fundamental to understanding dilution in an acquisition scenario.