Question

At January 1, 2021, Canaday Corporation had outstanding the following securities: 780 million common shares 40 million 8% cumulative preferred shares, $50 par 6.4% convertible bonds, $2,500 million face amount, convertible into 70 million common shares The following additional information is available: • On September 1, 2021, Canaday sold 72 million additional shares of common stock. • Incentive stock options to purchase 40 million shares of common stock after July 1, 2020, at $14 per share, were outstanding at the beginning and end of 2021. The average market price of Canaday's common stock was $20 per share during 2021. • Canaday's net income for the year ended December 31, 2021, was $1,548 million. The effective income tax rate was 25%. Required: 1. & 2. Calculate basic and the diluted earnings per common share for the year ended December 31, 2021. (Round "Earnings per share" answers to 2 decimal places. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Numerator 1 Denominator Earnings per Basic Diluted

Answer 1

Answer:

Numerator (Basic EPS): Net income = $1548 million; Preferred dividends = $160 million [(8% x $50) x 40 million]. Because the preferred stock is cumulative dividends are included whether or not preferred stock is cumulative , dividends are included whether or not paid.

Denominator (Basic EPS): Weighted average number shares common stock outstanding

1/1-12/31   780 million*(12/12)=780 million

9/1-12/31    72 million(4/12)=24 million

Weightage average no of share=804 million

EPS= (1548-160)/804=$1.73per share

Stock Options: Use the Treasury Stock Method if dilutive.

1. Are the stock options dilutive? Yes because the exercise price of $14 is less than the average market price of $20.

2. Assume exercise at the later of the date of issue (7/1/20) or the beginning of the period(1/1/21). Assume exercise 1/1/21.

3. Proceeds received on exercise = 40 million x $10 = $400 million

4. No. Shares repurchased = $400 million ÷ $20 = 20 million

5. Net increase in No. shares outstanding = 20 million (40 million – 20 million)

6. EPS with the inclusion of the options: ($1548 - $160) ÷ (804+ 20) =$1.68 (this will be used to test for dilutive effect of convertible bonds)

Convertible Bonds: Use the If Converted Method

1. Assume conversion at later of date of issue (?) or beginning of year(1/1/21). Assume conversion on 1/1/21.

2 Interest not paid net of tax = $96 million [(6.4% x $2,500 million) x60%]

3. No. additional shares on conversion = 60 million

4. Conversion ratio = $96 ÷ 70 = $1.37

5. Dilutive because $1.37 is less than $1.68.

Basic EPS= (1548-160)/804=$1.73per share

Diluted EPS= (1548-160+96)/804+20+70=1484/894

=1.66