What is the formula used to calculate pro forma EPS in an all-stock deal?

The formula used to calculate pro forma EPS in an all-stock deal is based on how the combined net income of the acquiring company and the target company is related to the total shares outstanding after the transaction. In an all-stock merger, shareholders of the target company receive shares in the acquiring company, which adjusts the share count.

The correct approach involves taking the combined net income of both companies and dividing it by the new total shares outstanding, which reflects the total number of shares after the merger. This calculation provides an accurate representation of the earnings per share on a pro forma basis, taking into account the dilution of existing shares and the increase in total shares due to the issuance of new equity in exchange for the target company.

This method is crucial for investors as it allows them to assess how the merger impacts earnings per share, a key indicator of a company's profitability and valuation. It ensures that both the contribution from the target's earnings and the impact of the increased share count from the transaction are captured in the resulting pro forma EPS.