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ABC Ltd. has 10,00,000 ordinary shares and 1,000 ₹100 10% convertible bonds (each convertible into 20 shares). Share price ₹4.50; earnings ₹5,00,000; tax 21%. Basic and diluted EPS:
ABasic ₹0.50; diluted ₹0.40
BBasic ₹0.50; diluted ₹0.498 (= (500,000 + 7,900) / (10,00,000 + 20,000))
CBasic ₹0.40; diluted ₹0.498
DBasic ₹0.50; diluted ₹0.50 (anti-dilutive)
Answer & Solution
Correct answer: B. Basic ₹0.50; diluted ₹0.498 (= (500,000 + 7,900) / (10,00,000 + 20,000))
Interest saved if converted = 1000×100×10% = ₹10,000; net of tax (1−0.21) = ₹7,900. Incremental shares = 1000×20 = 20,000. Incremental EPS = 7,900/20,000 = ₹0.395 < basic ₹0.50 → dilutive. Diluted EPS = (5,00,000 + 7,900)/(10,00,000+20,000) = ₹0.498.
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