Gilkey, a hardware store in Christchurch, New Zealand, had $150,000 in convertible 6% bonds outstanding all year. Each bond has a face value of $1,000 and is convertible to 5 common shares. The corporate tax rate was 30% for Gilkey. What is the impact on diluted EPS?

Question

Quizplus · Accepted Answer

The impact on diluted EPS from the convertible bonds involves calculating the interest saved after taxes and dividing it by the number of shares the bonds can be converted into. The annual interest is 6% of $150,000, which is $9,000. After a 30% tax rate, the interest saved is $9,000 * (1 - 0.30) = $6,300. Since each bond is convertible into 5 shares, the total number of shares for conversion is $150,000 / $1,000 * 5 = 750 shares. Therefore, the impact on diluted EPS is $6,300 / 750 = $8.40.

Gilkey, a Hardware Store in Christchurch, New Zealand, Had $150,000