In a merger model, how is the Combined EPS calculated?

In a merger model, how is the Combined EPS calculated?

• A. (Combined Pre-Tax Income) × (1 − Buyer's Tax Rate) ÷ (Buyer's existing Shares + New Shares Issued in the Deal)
• B. Sum of Net Incomes ÷ Combined Share Count
• C. Combined Net Income ÷ Buyer's existing shares
• D. Net Income minus synergies ÷ total assets

Answer: (A)

EPS is after-tax earnings allocated to each share. In a merger, you combine the two sides’ profits, tax that total, and then spread it over the total number of shares that will exist after the deal. That means taking the combined pre-tax income and applying the tax rate to get after-tax income, then dividing by the post-transaction share count (the buyer’s existing shares plus any new shares issued to finance the deal). This directly gives the Combined EPS. It’s the correct approach because EPS must reflect both the total after-tax earnings and the dilution from new shares; other formulas either omit the tax step, ignore the new share issuance, or mix in assets rather than share count.

EPS is after-tax earnings allocated to each share. In a merger, you combine the two sides’ profits, tax that total, and then spread it over the total number of shares that will exist after the deal. That means taking the combined pre-tax income and applying the tax rate to get after-tax income, then dividing by the post-transaction share count (the buyer’s existing shares plus any new shares issued to finance the deal). This directly gives the Combined EPS. It’s the correct approach because EPS must reflect both the total after-tax earnings and the dilution from new shares; other formulas either omit the tax step, ignore the new share issuance, or mix in assets rather than share count.