Calculate the incremental EPS for the following instrument: $$\begin{array}{l}
\begin{array} {| l | r |}
\hline\text { Convertible bonds outstanding, yield of } 5 \% \text { and }\
\text { coupon rate of } 4 \% & \$ 2,000,000 \
\hline \text { Issue date } & \text { January } 1,2013 \
\hline \text { Maturity date } & \text { December } 31,2020 \
\hline \text { Conversion rate for each } \$ 1,000 \text { bond } & 40 \text { ordinary shares } \
\hline \text { Income tax rate } & 25 \% \
\hline
\end{array}
\end{array}$$
A)1.88
B)0.75
C)0.31
D)0.25

Question

Calculate the incremental EPS for the following instrument: $$\begin{array}{l}
\begin{array} {| l | r |} 
\hline\text { Convertible bonds outstanding, yield of } 5 \% \text { and }\
 \text { coupon rate of } 4 \% & \$ 2,000,000 \
\hline \text { Issue date } & \text { January } 1,2013 \
\hline \text { Maturity date } & \text { December } 31,2020 \
\hline \text { Conversion rate for each } \$ 1,000 \text { bond } & 40 \text { ordinary shares } \
\hline \text { Income tax rate } & 25 \% \
\hline
\end{array}
\end{array}$$
A)1.88
B)0.75
C)0.31
D)0.25

Quizplus · Accepted Answer

The correct answer is A because the incremental EPS is $1.88. The incremental EPS is calculated as follows:Interest expense = $2,000,000 * 4% = $80,000After-tax interest expense = $80,000 * (1 - 25%) = $60,000Incremental EPS = $60,000 / (2,000,000 * 40) = $1.88

Calculate the Incremental EPS for the Following Instrument A)188 B)0

Calculate the Incremental EPS for the Following Instrument A)188
B)0