# Diluted EPS

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

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

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…

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.

S2000magician:

Thanks a lot for the explantion.

My pleasure.

you are welcome.