Calculate the income effect on the incremental EPS for the following instrument: Convertible bonds outstanding, yield of 6% and coupon rate of 6%
$2,000,000
Issue date
January 1, 2021
Maturity date
December 31, 2028
Conversion rate for each $1,000 bond
20 ordinary shares
Income tax rate
25%
A)0.75
B)2.25
C)40,000
D)90,000

Question

Quizplus · Accepted Answer

The income effect is calculated as the interest saved due to conversion, which is $2,000,000 * 6% = $120,000. After tax, this is $120,000 * (1 - 0.25) = $90,000.

Calculate the Income Effect on the Incremental EPS for the Following