What should be analyzed to determine whether a deal is dilutive or accretive?

• A. Market trends and forecasts
• B. Historical stock performance
• C. Cost of cash compared to seller's yield
• D. Asset devaluation

Answer: (C)

To determine whether a deal is dilutive or accretive, analyzing the cost of cash compared to the seller's yield is essential. This comparison sheds light on how the financing of the acquisition—whether it’s through debt or equity—affects the overall earnings per share (EPS) post-transaction.

If the cost of cash (i.e., the interest rate on debt or the required return on equity) is higher than the yield on the seller's assets (typically assessed through metrics like return on invested capital), the deal is likely to be dilutive, lowering the acquirer’s EPS. Conversely, if the seller’s yield exceeds the cost of cash, the deal is likely to be accretive, increasing the EPS. Therefore, this analysis directly influences the financial viability and attractiveness of the transaction in terms of shareholder value, making it the correct focus for determining a deal’s impact on earnings.

Additional context reveals that considering market trends and forecasts, historical stock performance, or asset devaluation, while potentially relevant to broader strategic assessments, does not directly answer the specific question of whether a deal is dilutive or accretive from an earnings perspective.