CFA Practice Question

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CFA Practice Question

In determining earnings per share (EPS), the interest expense on convertible debt that is dilutive (net of applicable taxes) should be ______

A. ignored for both basic and diluted EPS.
B. ignored for basic EPS and added back to net income for diluted EPS.
C. added back to net income for both basic and diluted EPS.
Correct Answer: B

While convertible debt is not factored into the calculation of basic EPS, the interest expense is added back to net income in determining dilutive EPS. This is based on the assumption that if the security is converted to equity, no interest expense will have to be paid.

User Contributed Comments 5

User Comment
eb2568 ...DOH!
jainrajeshv I m confused now, when we are calculign the Basic EPS we have to deduct the Interest expenses payable to convertible bond holder.

Am I wrong? Pls Reply
Dinosaur That is already in net income ...
gazelle f convertible debt is dilutive, then debt's after-tax interest expense is not considered an interest expense for diluted EPS=> interest expense multiplied by (1- tax rate) must be added back to numerator (Net income).
johntan1979 I think someone needs to go back to kindy to learn more words than just doh
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