If-Converted
Investment Banking glossary · Valuation & Implied Share Price Mechanics
Definition
Method for testing dilution from convertible bonds or convertible preferred stock. Assumes full physical conversion at the start of the period: (1) add the after-tax interest (or preferred dividend) back to the numerator since it would not be paid, Addback = Principal × Coupon × (1-t); (2) add the conversion shares to the denominator: Shares = Principal/Conversion Price; (3) compare resulting EPS to basic. Include only if dilutive (lower EPS). For ITM converts treated as equity in the EV bridge, remove the principal from total debt to avoid double-counting.
If-Converted in plain English
Some bonds and special shares come with a coupon: the owner can trade them in for a fixed number of regular shares. That's great for them, but it's bad for existing shareholders, because more shares means each slice of the company's profit gets smaller. "If-converted" is just a fairness test: bankers pretend everyone traded in on day one and re-calculate earnings per share. Two things change: the company saves the interest it was paying on those bonds (so profit goes up a little, adjusted for taxes with (1-t)), and the share count goes up by the new shares created (principal divided by the price they convert at). If that pretend swap makes earnings-per-share go DOWN, it's a real risk, so you report it; if it would raise EPS, you ignore it (you never let a conversion flatter the numbers).
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