This is the email i sent my prof:: have a question regarding a problem in the te

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This is the email i sent my prof::

have a question regarding a problem in the textbook.Specifically, chapter 19 regarding Earnings Per Share. On page1031-2, the concept review excercise (I won't assume you have thebook with you), it states:


Net income for 2009: 180 million
Also, At January 1, 2009, $200 million of 10% convertible noteswere outstanding. The notes were converted on April 1 into 16million shares of common stock.
The tax rate is 40%.
These are the only relevent data.

In the solution, when calculating the Diluted EPS, the textbook hasthis as their numerator (in millions):::    $180 +[$20 - 40%($20)] x (3/12) = 183.   This is net incomeplus "Assumed after-tax interest savings."

I cannot for the life of me figure out why they multiplied by(3/12). I thought for the numerator we were adding back the"would-have-been" interest expense that was never paid?? Wouldn't this mean that we should be multiplying by (9/12) sinceinterest on the notes were not paid from April until year end?resulting in a final numerator of $189?


Please help, I have been staring at this problem for half an hour,I hope it's just a typo and I'm stressing over nothing


He replies::
The only show 3 months of interest so we back out the full amountthat there is to be backed out.


what the hell is he saying? someone explain this to me? is itsuposed to be 3/12 or 9/12???

Explanation / Answer

Elimination of interest on convertible notes (net oftax) ==================================== Actual conversion on April 1 ===================== $200 million x 10%      = $20millions tax40%                      =    $8 millions Net oftax                 =  $12 millions After conversion there would beno interest payable on notes i.e. Saving in interest for the periodfrom 1st Jan to March 31 = 3months. Savings in interest payment for 3months only i.e. $12 x 3 /12    =   $3 millions (Since at theend of the year there would be no interest payable on notes due totheir conversion in 16 millionsshares) After conversion there would beno interest payable on notes i.e. Saving in interest for the periodfrom 1st Jan to March 31 = 3months. Savings in interest payment for 3months only i.e. $12 x 3 /12    =   $3 millions (Since at theend of the year there would be no interest payable on notes due totheir conversion in 16 millionsshares)

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