Final answer:
The incremental effect of bond conversion is calculated by dividing after-tax interest savings from the conversion by the number of shares issued upon conversion. This analysis is used to determine the per-share increase in earnings resulting from the reduced interest expenses.
Step-by-step explanation:
The incremental effect of conversion of the bonds is the after-tax interest saved divided by the number of new shares released upon conversion. Here's how it might look mathematically:
- First, calculate the after-tax interest expenses the company would incur if the bonds were not converted into shares.
- Next, determine the interest expenses that the company has actually saved due to the conversion of bonds into equity.
- Finally, divide these after-tax interest savings by the number of shares that were issued upon conversion to determine the incremental effect per share.
The formula shows the per-share increase in earnings that the bond conversion generates, by reducing the company's interest costs. This calculation assists investors in understanding the financial implications of bond conversions on the company's profitability.