The manufacturer Desperate for Cash Inc issued 150 million o

The manufacturer Desperate for Cash, Inc. issued $150 million of notes that are convertible into its common shares. The if-converted method requires the firm to do the following as part of the process to calculate diluted earnings per share (there may or may not be other steps in the process):

Select one:

a. Recalculate net income under the treasury method by adding back the interest expense of the convertible notes and removing the tax expense associated with the interest on the notes (i.e. as if it were not in the calculation)

b. Recalculate operating income under the if-converted method by adding back the interest expense of the convertible notes and removing the tax expense associated with the interest on the notes (i.e. as if it were not in the calculation)

c. None of the listed answers

d. Increase the number of common shares outstanding as if the convertible notes had been converted

e. All of the listed answers

Solution

In the If- converted method,

the numerator is adjusted by an increase to the net income computed for basic EPS adding back the interest expense of the convertible notes and removing the tax expense associated with the interest on the notes.

The denominator is increased with the number of shares that have been created out of the conversion.

Since option b and d justify the above explanation,

Option E is correct, all the listed answers are correct.