Question

On December 31, 2017, Berclair Inc. had 220 million shares of common stock and 4 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 $110 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.

Exercise 19-19 EPS; stock dividend; nonconvertible preferred stock; treasury shares; shares sold; stock options, convertible bonds (LO19-5,19-6, 19-7, 19-8, 19-9) On December 31, 2017, Berclair Inc. had 220 million shares of common stock and 4 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 iss 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 $110 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).) Numerator Denominator - Earnings per Share 74 Basic EPS Diluted EPS

Answer 1

	Numerator	/	Denominator	=	Earning per Share
Basic EPS	$74	/	211	=	$0.35
Diluted EPS	$74	/	217	=	$0.344

Basic EPS :-

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

1/1 – 12/31: 220 x (12/12) = 220 * 1.05 = 231

3/1 – 12/31 (24) x (10/12) = (20) * 1.05 = (21)

10/1 – 12/31 4 x (3/12) = 1

Weighted Average = 211

Exercisable Securities, Stock Options

Are they dilutive?

Yes because the exercise price of $56/share < the market price of $70/share.

Use the Treasury Stock Method

The Treasury Stock Method assumes that the proceeds received upon exercise of $1,680 (30 million x $56) are used to buy back stock at the average market price, i.e., $1,680 ÷ $70 = 24

The net increase in the number of shares = 6 million (30 million The net increase in the number of shares = 6 million (30 million issued upon exercise – 24 million repurchased)

Convertible Securities, Bonds

Are they dilutive? Is interest net of tax divided by the # shares issued on conversion ≤ EPS without assumed conversion? Interest not paid, net of tax = $3 [(8% x $62.5) x 60%]

# shares issued on conversion = 6 million # shares issued on conversion = 6 million

$3 ÷ 6 = $0.50

EPS without assumed conversion = ($110 - $36) ÷ (211 + 6) = $0.34

The convertible bonds are dilutive because $0.50 > $0.34

Diluted EPS = ($150 - $27 ) ÷ (211 + 6) = $0.34