[Anonymous]

3,000 bonds that $1000 par, and 9% convertible. The bonds were originally issued at par, and each bond was convertible into 30 shares of common stock. The tax rate was 30%. Weighted average number of common shares outstanding: 25000, Net income 200,000, no dividends were delcared.

I got the BEPS, just can’t figure out DEPS, the convertible bond transaction literally.

[M.O.D.]

The bonds are convertible, that means you have to convert them to calculate diluted EPS. You increase the amount of shares that the bonds convert to (30 x 3000 = 90,000). But if they converted (assumed at the beginning of the year, or when they were first issued during the year), then the company does not have to pay interest on the bonds anymore.

If the company paid no interest then the interest expense is added back to the Net Income. Because the interest is tax deductible, you also have to subtract the tax benefit of that expense. The interest is 9% x 3 mil = 270,000. This is added to net income. The tax benefit of that is 30% x 270,000 = 81,000. This is subtracted from Net income.

(200 + 270 -81)/(25 + 90) = 389/115 = 3.38

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[How many letters do you need]

Edited because I miscounted the 0s….

Good DEPS explanation MOD

MBA,CMA,CPA, CFF?, ABV?

[Author]

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