I haven’t seen this question anywhere and can’t find clarification in the CFAI stuff… but do you add interest expense or interest (coupon) payment to Net Income when calculating?
i believe is coupon but generally they only give a rate in those type of questions…
A bit confused. A convertible bond interest expense is the coupon payments no?
What’s the difference between interest expense and an interest coupon payment? Aren’t they the same? As far as I know it’s NI + (convertible debt interest)(1-t)
You need to test whether or not the bonds will be dilutive. They will give you interest expense. (Interest Expense*(1-T))/Converted Shares If this is less than the Basic EPS they will have a dilutive effect. If they are not dilutive you do not include them in the basic EPS. Jim, are you taking the exam in Atlanta?
@jmhatlanta From what I’ve seen they have been giving convertible debt at par. IMO, I don’t think they would try and be this tricky on a question that is focusing on diluted EPS. I’d just be adding (interest payment)(1-t) back to NI. Make sure it is dilutive and decreases EPS because I could see them throwing that curve ball. @lincfucious Interest expense = BV at beginning of period * YTM Interest expense differs from interest coupon when you have discount/premium bonds. Interest coupon = Face value * coupon rate.
Cheer E2, that helps.
If you are talking about interest expense on the income statement, this may be misleading because you have interest on short term debt that isnt part of cost of capital. only interest in long term debt.
are preferred dividends removed from net income when calculating diluted EPS, or only for basic EPS? thanks
The preferred dividends are added back to NI if they’re conversion is dilutive. I got in the habit of always subtracting them and then, if necessary, I’ll add them back in.
interest expense… it’s accrual accounting, remember. coupon becomes relevant in financial statement only in the CFS.