Calculate 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)$0.94
B)$0.75
C)$0.31
D)$0.25

Question

Quizplus · Accepted Answer

The incremental EPS calculation involves determining the impact on earnings per share if convertible bonds are converted into ordinary shares. Here's the breakdown:1. **Interest Savings**: The company saves on interest payments if the bonds are converted. Annual interest = 5% of $2,000,000 = $100,000. After-tax savings = $100,000 * (1 - 0.25) = $75,000.2. **Additional Shares**: The conversion would result in additional shares. Total conversion = 40 shares per $1,000 bond * 2,000 bonds = 80,000 shares.3. **Incremental EPS**: Incremental EPS = Interest Savings After Tax / Additional Shares = $75,000 / 80,000 = $0.9375, which rounds to $0.94.Therefore, the incremental EPS is $0.94.

Calculate the Incremental EPS for the Following Instrument: Convertible Bonds