Diluted EPS

CFA Level I FRA
#1

Please clarify:

While calculating diluted EPS, in case of convertible bonds, we add back the interest (net of tax) to the numerator in the EPS formula.

My doubt is - is it the interest net of tax or the tax amount itself that should be added?

For eg.

Interest on convertible bonds - $60,000

Marginal Tax rate 40%

Should I add to the numerator : $24000 ($60,000*0.4) or $36000 ($60,000*0.6). In case it is $24000, please add one or two lines to explain the reasoning, because I am under the impression that it should be $36000.

Thanks in advance for the clarification

#2

it is the interest after deducting tax, ie 36000 in the above case.

#3

India_28:

Thank you for the clarification. However I saw that $24000 was added in an explantion here => http://financialexamhelp123.com/earnings-per-share-eps/

Thanks again…

#4

Think of it this way: how much did you pay, _ net _, for the interest on those bonds?

Well, you paid $60,000, but you saved $24,000 (= $60,000 × 40%) in taxes, so you paid, net, $36,000 (= $60,000 – $24,000).

If the bonds had been converted, how much more net income would you have?

$36,000.

That’s what you add.

#5

S2000magician:

Thanks a lot for the explantion.

#6

My pleasure.

#7

you are welcome.