A convertible bond's net-of-tax interest expense is added back to net income when determining diluted earnings per share only if the bond is known to be dilutive.

Question

Quizplus · Accepted Answer

This statement is true. The net-of-tax interest expense of a convertible bond is only added back to net income when calculating diluted earnings per share if the bond is dilutive, meaning that it would decrease the earnings per share if converted into common shares. If the bond is anti-dilutive (i.e. it would increase earnings per share if converted), the interest expense is not added back.

A Convertible Bond's Net-Of-Tax Interest Expense Is Added Back to Net