If a buyer's EPS increases by only 2% in the first year after an acquisition, what might the buyer consider doing to enhance EPS?

Increasing debt financing while reducing equity financing can enhance a buyer's earnings per share (EPS) for a few reasons. When a company finances its acquisition with debt instead of issuing new equity, it avoids diluting the existing shares. This means that the earnings that the company generates after the acquisition will be distributed among fewer shares, effectively raising the EPS.

Moreover, if the acquisition leads to an increase in operating income that exceeds the interest expense of the debt, the overall financial performance—and therefore, the EPS—can significantly improve. Utilizing debt can also provide a tax shield since interest on debt is tax-deductible, potentially boosting net income further.

In contrast, raising equity financing could lead to dilution of ownership, impacting existing shareholders negatively. Reducing operational costs may not always lead to an immediate increase in EPS and could potentially harm long-term sustainability or growth prospects. Focusing solely on increasing sales revenue might not capture the importance of the capital structure in determining EPS and may not directly address the underlying reasons for the limited growth in EPS following the acquisition. Therefore, the strategy of increasing debt while reducing equity is a proactive approach aimed explicitly at enhancing EPS post-acquisition.