Don\'t really understand what I\'m doing wrong on this one On December 31, 2015,

Question

Don't really understand what I'm doing wrong on this one On December 31, 2015, Berclair Inc. had 240 million shares of common stock and 5 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2016, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2016 Four million treasury shares were sold on October 1. Net income for the year ended December 31. 2016, was $150 million. The income tax rate is 40%. Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2011. The options are exercisable as of September 13, 2015, for 30 million common shares at an exercise price of $56 per share. During 2016, the market price of the common shares averaged $70 per share. In 2012 $62 5 million of 8% bonds, convertible Into 6 million common shares, were issued at face value. Compute Berclairs basic and diluted earnings per share for the year ended December 31, 2016

Explanation / Answer

1. Numerator Basic EPS = Net income $150 million less preference dividend $45 million( 5 million shares* 9%*$100) = $105 million

Denominator Basic EPS = weighted average shares of common stock outstanding

Basic EPS =$105 million/ 232 = $ 0.45

2. Excercisable Securities , stock option - Are they dlutive? Yes because the excercise price of $56 / Share is less then the market price of $70/share. Use Treasury stock Method.

1.Excercise is assume to take place at the later of the date of issue(09/13/15) or the begining of the year (1/1/13).

2. The Treasury stock Method assumes that the proceeds received upon exercise of $1,680($56*30million) are used to buy back stock at avergae market price i.e $1680/$70 = 24

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

Convertible Securities Bonds - Are they dlutive? NO

Interest net of tax divided by the shares issued on conversion is less than or equal to EPS without assumed conversion.

Interest not paid net of tax = ( $62.5 million* 8%) *.(1*0.4) = $3 million

shares issued on conversion = 6 million

$3 million/  6 million = $0.5

EPS without assumed conversion = ($150 -$45) / 232+6 = $ 0.44

The convertible bonds are not dilutive because $0.5> $ 0.44

If Converted Method

1. Assume conversion at the later of the date of issue (2011) or the beginning of the period (1/1/15).Assume conversion 1/1/15.

2. Add back to the numerator the interest, net of tax.

3. Add to the denominator the weighted average # shares issued on assumed conversion.

Diluted EPS = ($150 - $45 + $3) / (232 + 6 + 6)

=$108/ 244

= 0.44

Balnce shares 1/1 - 12/31 240(12/12) = 240*1.05 252 Tresury stock Purchased 3/1 - 12/31 (24)(10/12)= 20*1.05          (21) Tresury stock sold 10/1 -12/31 4 (3/12) = 1 Weighted Average shares 232

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