ch 19 part 2: Earnings per share 2. On December 31, 2015, Berclair Inc. had 240
ID: 2490287 • Letter: C
Question
ch 19 part 2: Earnings per share
2.
On December 31, 2015, Berclair Inc. had 240 million shares of common stock and 6 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2016, Berclair purchased 40 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 $300 million.
Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2011. The options were exercisable as of September 13, 2015, for 36 million common shares at an exercise price of $40 per share. During 2016, the market price of the common shares averaged $60 per share.
Compute Berclair’s basic and diluted earnings per share for the year ended December 31, 2016. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)
1. Basic EPS :
2. Diluted EPS :
ch 19 part 2: Earnings per share
2.
On December 31, 2015, Berclair Inc. had 240 million shares of common stock and 6 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2016, Berclair purchased 40 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 $300 million.
Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2011. The options were exercisable as of September 13, 2015, for 36 million common shares at an exercise price of $40 per share. During 2016, the market price of the common shares averaged $60 per share.
The options were exercised on September 1, 2016. Required:Compute Berclair’s basic and diluted earnings per share for the year ended December 31, 2016. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)
1. Basic EPS :
2. Diluted EPS :
Explanation / Answer
Answer:
First we need to calculate weighted avergae number of shares outstanding.
Calculating weighted avergae number of shares outstanding:
Common stock issued along with the dividend : 240 million shares *$1.05 per share = $252 million
Less: Tresury stock issued along with dividend for 10 months (from march 2016 to december 2016):40 million shares *(10/12) months *$1.05 per share = $35 million
Add: Treasury stock sold on october 1: 4 million shares *(3/12) months = $1 million
weighted avergae number of shares outstanding = $218 million
Calculating Basic EPS:
Basic EPS = Net income/ weighted avergae number of shares outstanding
Basic EPS = $300 million/218 million shares = $1.38 per share
Calculating Diluted EPS:
Diluted EPS = Net income /Diluted shares
Total Amount paid to exercise the option = 36 million share options * $40 per share = $1440 million
No. of shares could be purchased with the proceeds from the options = Total Amount paid to exercise the option/Average market price per share
= $1440 million/$60
= 24 million shares
Incremental no. of shares = 36 million share options - 24 million shares potentially purchased
= 12 million shares
Diluted shares = Incremental no. of shares + weighted average number of shares already outstanding
Diluted shares = 12 million + 218 million = 230 million shares
Diluted EPS = $300 million / 230 million shares = $1.30 per share
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