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Coco corp issued $500,000 of convertible 6% bonds on May 31, 2018. Each of the 500,...

Coco corp issued $500,000 of convertible 6% bonds on May 31, 2018. Each of the 500, $1,000 bonds is convertible into 20 shares of common stock. The bonds pay interest semiannually on Jan 1 and July 1.  The bonds are dated Jan 1, 2018. If coco's tax rate is 25% and the market price of the stock on 12/31/18 is $24/share, what is the effect on EPS for this bond for 2018?

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Answer #1

Annual interest payment on bonds shall be $ 30000.

Due to payment of interest, there will be a tax savings by $ 7500 [30000*25%]

Therefore, net decrease in earnings shall be $22500.

As there is no data available with regard to number of common stock issued as on date, the overall impact on EPS shall be $22500 / No. of common stock.

Also there is no detail about date of conversion of bonds into common stock. However, upon conversion of bonds into common stock, 10000 common stock is required to be issued. Hence, Earnings per share shall be reduced due to increase in number of common stock

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