Question

On December 31, 2017, Berclair Inc. had 250 million shares of common stock and 10 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2018, Berclair purchased 90 million shares of its common stock as treasury stock. Berclair issued a 4% 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 $500 million. Also outstanding at December 31 were 45 million incentive stock options granted to key executives on September 13, 2013. The options were exercisable as of September 13, 2017, for 45 million common shares at an exercise price of $50 per share. During 2018, the market price of the common shares averaged $75 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 (i.e., 10,000,000 should be entered as 10).) Numerator 1 Denominator = Earnings per Share Basic EPS Diluted EPS

Answer 1

Solution

Berclair Inc

Computation of basic and diluted earnings per share for the year ended December 31, 2018:

	Numerator	÷	Denominator	=	Earnings per Share
Basic EPS	$410 million	÷	183 million shares	=	$2.24
Diluted EPS	$410 million	÷	198 million	=	$2.07

Computations:

Basic EPS –

Net income to common shareholders –

Net income to common shareholders = Net income – preferred dividend

Net income = $500 million

Preferred dividend = 9% x 10 million x $100 = $90 million

Net income to common shareholders = $500 - $90 = $410 million

(Note: since the preferred stock is cumulative, the dividend should be deducted, regardless of whether paid or not)

Computation of weighted average number of common shares outstanding:

Jan 1 – Dec 31      250 million shares x 12/12 x 1.04 = 260 million shares

March 1 – Dec 31 (90) x 10/12 x 1.04 = (78) million shares

Oct 1 – Dec 31      4 x 3/12 = 1 million shares

Weighted average number of shares = 260 – 78 + 1 = 183 million shares

Basic EPS = $410 million/183 million shares = $2.24 per share

Diluted EPS –

Stock options -
the exercisable securities, stock options are dilutive as the exercise price of $50 per share is less than the market price per share of $75.

Treasury stock method:

Exercise is assumed to have taken place at the beginning of the year 2018.

It is assumed that proceeds from exercise $2,250 million ($50 x 45 million) are used to buy back stock at the average market price of $75, $2,250/$75 = 30 million shares

The net increase in the number of shares = 45 – 30 = 15 million shares

(45 million issued up on exercise – 30 million repurchased)

Weighted average number of common shares outstanding = 183 + 15 = 198 million

Diluted earnings per share = $410 million/198 million shares = $2.07