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Canada Corp.
A firm has $10 million of outstanding convertible bonds. The coupon on these convertibles is $100 per bond, and each bond is convertible into common stock at a conversion price of $25.

The income statement of the firm before conversion is as follows and EBIT remains at $6 million after conversion. Assume the firm paid $2 million in interest on other outstanding debt in addition to the interest paid on the convertible bonds.

	Millions of Dollars before Conversion
EBIT	6.0
Interest @10%	–3.0
Earnings before taxes (EBT)	3.0
Taxes @40%	–1.2
Earnings after taxes (EAT)	1.8
Shares outstanding (millions)	1.0
Earnings per share (EPS)	$1.80

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$1.71 million

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$2.04 million

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$2.40 million

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$3.17 million

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