Calculate the share effect on the incremental EPS for the following instrument: Convertible bonds outstanding, yield of 5% and coupon rate of 5%
$2,000,000
Issue date
January 1, 2021
Maturity date
December 31, 2028
Conversion rate for each $1,000 bond
40 ordinary shares
Income tax rate
25%
A)0.63
B)0.94
C)75,000
D)80,000

Question

Quizplus · Accepted Answer

The share effect on incremental EPS is calculated by dividing the interest saved (after tax) by the number of shares created upon conversion. The interest saved is $2,000,000 * 5% * (1 - 0.25) = $75,000. The number of shares created is ($2,000,000 / $1,000) * 40 = 80,000 shares. Therefore, the share effect is $75,000 / 80,000 = 0.9375, which rounds to 0.94.

Calculate the Share Effect on the Incremental EPS for the Following