Accretion

What is Accretion?

Accretion is about the incremental and gradual growth of Earnings and assets to business expansion, mergers, acquisitions, and the internal growth of the company.

In finance, accretion is also known as the amalgamation of Capital gains that an investor expects to get after buying a bond at a specific discount and holding the same until it gets mature.

Figuring Out Accretion

In the corporation finance, accretion is the formation of value by natural growth or after a transaction has been done. The reason behind this can be the acquiring of a new asset at a discounted price or lesser than the said current Market value (CMV). It also comprises the asset acquisition that can grow the value because of the occurrence of a transaction.

In the securities market, on the other hand, buying Bonds lesser than their Par or Face Value is regarded as buying at a discounted price. Whereas, buying at a rate which is more than the face value is known as purchasing at a premium.

Furthermore, accretion in finance alters the cost on the Basis of the purchase amount. For instance, if you buy a bond that is purchased at an amount of 80% of its face amount, 20% will be the accretion.

Accretion Examples

Let’s take an accretion example here. Suppose a company has generated Rs. 2,00,000 in earnings for common shareholders. And, it has outstanding shares of 1,000,000 amount. The EPS ratio is Rs. 150. Now, the company issues 200,000 shares to buy a company that is generating Rs. 600,000 in earnings for the common shareholders.

Now, the new EPS for both the companies will be calculated by dividing Rs. 2,600,000 earnings by 1,200,000 shares. Investment professionals will Call this additional earning as accretion because of the purchase.

Here is another example – in case a person buys a bond with a value of Rs. 1,000 for the discounted price of Rs. 750 and hold it for 10 years, the deal will be regarded as accretive. Here, the bond will pay out both the interest and the initial investment.

Based on the type of bond, the person may get either annual interest or a lump sum amount during maturity. However, if the person has purchased a zero-coupon bond, there will be no interest accrual.