A company with convertible bonds outstanding will assume hypothetical conversion at the earliest point of the year to compute EPS.The numerator is ________.

Question

Quizplus · Accepted Answer

The numerator (earnings) is increased by the after-tax interest expense for the fiscal year because the company assumes hypothetical conversion of the convertible bonds, which would result in the bonds being exchanged for common shares. This would reduce the interest expense and increase the shares outstanding, resulting in a lower EPS. Therefore, the after-tax interest expense is added back to the numerator to adjust for this potential dilution.

A Company with Convertible Bonds Outstanding Will Assume Hypothetical Conversion