Diluted Earnings with Convertible Debt interest, anywhere, payment, question

prashantsahni

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?

ramzes

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)

smartpants

@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.

bluejazzy

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.

homie

are preferred dividends removed from net income when calculating diluted EPS, or only for basic EPS?

thanks

koba

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.