Chapter 20, Problem 20.13BE

Computing Diluted EPS, Convertible Debt. Axelon Enterprises has asked you to determine whether its proposed issue of convertible debt will have dilutive effects on earnings per share. If the convertible bonds prove to be dilutive, the company might consider an alternate vehicle to finance the $10,000,000 construction cost of a new plant facility Currently. Axelon’s basic earnings per share is equal to $14 per share after factoring in the after-tax interest expense on the proposed bond issue. The convertible debt will be issued on April 1 at $10,000,000 par value, pays interest at a rate of 6%, and is convertible to 200,000 common shares. Axelon’s tax rate is 25%. Will the convertible debt be dilutive? Provide a brief explanation and all computations needed to support your conclusion.