Earnings yield
M&A / Merger ModelThe inverse of the P/E ratio: earnings per share divided by price, and the cost of funding a deal with stock.
Earnings yield is one divided by the P/E. A company trading at 20 times earnings has a 5% earnings yield, meaning each share carries a claim on 5% of its price in earnings.
It is what makes the accretion test intuitive. Paying with stock costs the acquirer its own earnings yield, because each new share issued hands over that claim. Paying with cash costs the after tax interest given up; paying with debt costs the after tax interest now owed.
So the rule is a comparison of yields: if what you pick up yields more than what you give up, EPS rises, and if it yields less, EPS falls. That single sentence covers every funding mix without memorising separate cases.
It also explains why high multiple acquirers are structurally advantaged in stock deals. A low earnings yield means their currency is cheap, which is the arithmetic underneath bootstrapping.
Worked example
An acquirer trades at 20x, so a 5.0% earnings yield. It is considering a target at 14x, an earnings yield of 7.1%.
Funding entirely in stock, it picks up 7.1% and gives up 5.0%, so the deal is accretive by arithmetic before any synergies.
Funding with debt at 6% pre tax, or 4.5% after tax, it gives up only 4.5% and the accretion is larger still, which is why funding mix changes the answer even at a fixed price.