What is the purpose of conducting a bottom-up analysis in EPS calculation?

The purpose of conducting a bottom-up analysis in the context of earnings per share (EPS) calculation is to analyze the standalone EPS of the buyer and seller. This approach allows analysts to comprehensively assess the earnings power of individual entities before considering any potential synergies or impacts from a merger or acquisition. By focusing on the specific earnings and share counts of each entity, analysts can gain insights into how a transaction will influence the overall financial performance and shareholder value.

This method provides a detailed understanding of the financial positions of the involved parties, which is essential for making informed investment decisions or strategic financial planning. It emphasizes the importance of accurately evaluating each company's earnings capabilities in isolation, setting the stage for further analysis at the consolidated level.

Other options don't encapsulate the purpose of a bottom-up analysis. For instance, starting from revenue to move down to expenses reflects a different analytical perspective, focusing primarily on top-line performance rather than the particulars of the entities involved. Ignoring incremental expenses does not align with the accuracy needed for EPS calculation, and concentrating solely on cash flows disregards the broader aspects of earnings analysis that are critical for assessing each firm's standalone performance.