Question

On December 31, 2017, Berclair Inc. had 500 million shares of common stock and 20 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1. 2018, Berclair purchased 60 million shares of its common stock as treasury stock. Berclair issued a 6% 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 $1,000 million Also outstanding at December 31 were 81 million incentive stock options granted to key executives on September 13, 2013. The options were exercisable as of September 13, 2017 for 81 million common shares at an exercise price of $50 per share. During 2018, the market price of the common shares averaged $90 per share The options were exercised on September 1, 2018 Required: Compute Berclair's basic and diluted earnings per share for the year ended December 31, 2018. (Enter your answers in millions (ie, 10,000,000 should be entered as 10).) Numerator Denominator - Earnings per Share Basic EPS Duted EPS

Answer 1

Solution:

a) Basic EPS
Numerator (Basic EPS): Net income = $1000 million; Preferred dividends = $180 million (9% x $100 = $9/share x 20 million; since the preferred stock is cumulative, the dividend is deducted whether or not paid) = $1000 million-$180 million= $820 million
Denominator (Basic EPS): Weighted average shares of common stock outstanding
Period	Shares	Month	Cum-Dividend	Shares out standing
1st Jan to 31st Dec	500	12	1.06	530
1st Mar to 31 Dec	-60	10	1.06	-53
1st Oct to 31 Dec	4	3	1	1
Weighted Average Shares				478
Basic EPS ($820)/478			=	$1.72
b) Diluted EPS
Exercisable Securities, Stock Options
Are they dilutive? Yes because the exercise price of $50/share < the market price of $90/share
Use the Treasury Stock Method
1	The Options were excercised on september 1, 2018
2	The Treasury Stock Method assumes that the proceeds received upon exercise of $4,050 (81 million x $50) are used to buy back stock at the average market price, i.e., $4,050 ÷ $90 = 45
3	The net increase in the number of shares = 36 million (81 million issued upon exercise – 45 million repurchased)
EPS = ($1000 - $180) ÷ (478+45) = $1.5678
	Numerator	/	Denominator	=	Earning Per Share
Basic EPS	820	/	478	=	1.72
Diluted EPS	820	/	523	=	1.57