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In DEPS calculation what does convertible preference share mean? Is it redeemable or irredeemable preference share or does it can be both? And how is earning adjusted for this case? As book mentioned adjustment for earning is same as convertible loan but no tax effect? Why it is so and how is it calculated? May i know the complete working procedure?
Do you remember how the convertible debenture dilution works?
Then the convertible preference share dilution is calculated exactly the same with one large difference
Loan interest on a debenture is a tax allowable deduction so, as a consequence of converting a debenture, we shall no longer have to pay debenture interest
So that means that our profits increase because we have less expense
But that increase in profit means that our tax will also increase
Therefore, following a debenture conversion, our increase in profits available for equity shareholders will increase by the after-tax amount of the debenture interest saved
But preference share dividends are not allowable as tax deductible expenses so, as a result of converting preference shares, our profits available for equity shareholders will increase by the full amount of the preference dividend (previously shown as a finance cost but added back in a tax computation) that we no longer have to pay
To my knowledge irredeemable preference shares can not be converted
OK?
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