Calculate the income effect on the incremental EPS for the following instrument: Convertible bonds outstanding, yield of 8% and coupon rate of 8%
$5,000,000
Issue date
January 1, 2021
Maturity date
December 31, 2028
Conversion rate for each $1,000 bond
25 ordinary shares
Income tax rate
30%
A)$0.96
B)$2.24
C)$120,000
D)$280,000

Question

Quizplus · Accepted Answer

The income effect is calculated as the interest saved on the convertible bonds after tax. The annual interest is $5,000,000 * 8% = $400,000. After tax, the interest saved is $400,000 * (1 - 0.30) = $280,000.

Calculate the Income Effect on the Incremental EPS for the Following