Question

On December 31, 2017, Berclair Inc. had 200 million shares of common stock and 3 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2018, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2018. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2018, was $150 million. The income tax rate is 40%. Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2013. The options are exercisable as of September 13, 2017, for 30 million common shares at an exercise price of $56 per share. During 2018, the market price of the common shares averaged $70 per share. In 2014, $62.5 million of 8% bonds, convertible into 6 million common shares, were issued at face value. Required: Compute Berclair's basic and diluted earnings per share for the year ended December 31, 2018. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) X Answer is not complete. Numerator enominator Earnings per Share s 123 190 = 0.65 Basic EPS Diluted EPS 0

Answer 1

Answer -

	Numerator	/	Denominator	=	Earning per Share
Basic EPS	$123	/	190	=	$0.65
Diluted EPS	$126	/	202	=	$0.62

Diluted EPS:

Stock options:

Stock options are dilutive, because the exercise price of $56 per share is less than market price of $70 per share.

So,

To determine the treasury shares:

Proceeds received upon exercise of 30 million shares

= 30 million * $56

= $1680 million

Buy back stock at the average market price $70

= $1680 / $70

= 24 million shares

Then,

Net increase in the number of shares

= 30 million - 24 million

= 6 million shares

8% Convertible bonds:

Now,

Interest on convertible bonds (net of tax) = [$62.50 * 8% * (100% - 40%)]

Interest on convertible bonds (net of tax) = $3

Here,

Shares issued on conversion = 6 million

= $3 / 6 million shares = $0.50 per share

And

EPS without assumed conversion = (Net income - Preferred dividend) / (Weighted average shares + Shares issued on conversion)

= ($150 - $27) / (190 + 6)

= $0.63

So,

8% Convertible bonds are dilutive, because shares issued on conversion ($0.50) is less than EPS without assumed conversion ($0.63).

Diluted EPS = [Net income - Preferred dividend + Interest on convertible bonds (net of tax)] / [Weighted average shares + Shares issued on conversion + Net increase in the number of shares]

Diluted EPS = [$150 - $27 + $3] / [190 + 6 + 6]

Diluted EPS = $126 / 202

Diluted EPS = $0.62