Page 31 - FINAL CFA I SLIDES JUNE 2019 DAY 7
P. 31
Session Unit 7:
24. Understanding Income Statements
Example 1: EPS with convertible debt, p.62
During 20X6, ZZZ Corp. reported net income of $115,600 and had 200,000 shares of common stock outstanding
for the entire year. ZZZ also had 1,000 shares of 10%, $100 par, preferred stock outstanding during 20X6. During
20X5, ZZZ issued 600, $1,000 par, 7% bonds for $600,000 (issued at par). Each of these bonds is convertible to
100 shares of common stock. The tax rate is 40%. Compute the 20X6 basic and diluted EPS.
Compute the increase in shares assuming conversion at start 20X6:
(600)(100) = 60,000 shares
tanties
2.1 Net income by after-tax effect decrease in interest expense.
2.2 Compute diluted EPS as if the convertible debt were common stock
2.3 Check dilution: Diluted EPS = $0.50 < Basic EPS = $0.50
Lower
than 0.5
hence?
