Question

On December 31, 2017, Berclair Inc. had 600 million shares of common stock and 7 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2018, Berclair purchased 184 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 $1,150 million.

Also outstanding at December 31 were 30 million incentive stock options granted to key executives on September 13, 2013. The options were 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.

Required:

Compute Berclair's basic and diluted earnings per share for the year ended December 31, 2018

Answer 1

Berclair inc.

Basic EPS = ( net incoome - preference dividend ) / Weighted average number of common shares outstanding.

Weighted average number of common shares outstanding = 600 * 12/12 * 1.05 - 184 * 10/12 * 1.05 + 4 * 3/12 = 630 - 161 + 1 = 470 million shares

( 1150 - 7 * 100 * 9 % ) / 470 = 1087 / 470 = $ 2.313 per share

Dilutive EPS

Exercisable securities :- Use of treasury stock if dilutive

The securities are dilutive since the exercise price of $ 56 is less than the average market price of $70.

Assume exercise date to be 1/1/17

Proceeds recived on exercise = 30 * 56 = 1680 million

Shares repurchased = 1680 / 70 = 24 million

Net increase in shares outstanding = 30 - 24 = 6 million

EPS with inclusion of options :- 1087 / 470 + 6 = $ 2.284

Required answer
	Numerator /	Denominator =	EPS
Basic	1087/	470 =	2.313
Diluted	1087/	476 =	2.284