On December 31, 2015, Berclair Inc. had 400 million shares of common stock and 5

ID: 2521610 • Letter: O

Question

On December 31, 2015, Berclair Inc. had 400 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 $550 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. 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).)

Explanation / Answer

Basic and Diluted EPS calculation :

Date

Shares outstanding

period of outstanding

weighted average

1-Jan

400

400*12/12*1.05=420

1-Mar

-24

(24)*10/12*1.05=(21)

1-Oct

4*3/12=1

440

preferred dividend = 5*100*.09=45

Basic EPS =[net income -preferred dividend ]/weighted average common shares

=(550-45)/440

= $1.31 per share

shares issued as option=[30*56]/70=24

net increase in shares = 30 (given as exercise)- 24 = 6

shares issued on conversion are 6 million

weighted average shares : 440+ 6+6=452

Diluted EPS = [850-45]./452

= $ 1.78 per share