On December 31, 2015, Berclair Inc. had 520 million shares of common stock and 3

Question

On December 31, 2015, Berclair Inc. had 520 million shares of common stock and 3 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 S850 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).) NumeratorDenominatorEarnings per Share Basic EPS Diluted EPS

Explanation / Answer

Net income after tax = $850 million - 40% = $510 million

Numerator (Basic EPS): Net income = $510 million; Preferred
dividends = $27 million (9% x $100 = $9/share x 3 million; since
the preferred stock is cumulative, the dividend is deducted whether
or not paid)
Denominator (Basic EPS): Weighted average no. of shares of common
stock outstanding
1/1 – 12/31 520 x (12/12) = 520 X 1.05 = 546
3/1 12/31 (24) x (10/12) = (20) X 1.05 = (21)
10/1 – 12/31 4 x (3/12) = 1
Weighted average no. of shares = 526

Basic EPS = ($510 - $27) ÷ 526 = $0.92

Shares are dilutive because the exercise price of $56/share is less than the market price of $70/share.

Also 8% convertible bonds were issued in 2012, which are convertible into 6 million common shares.

Using the Treasury Stock Method:
1. Exercise is assumed to take place at the later of the date of issue
(9/13/15) or the beginning of the year (1/1/16). Assume exercise
1/1/13.
2. 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
3. The net increase in the number of shares = 6 million (30 million
issued upon exercise – 24 million repurchased

4. Also consider 6 million shares as a result of convertible bonds.

Diluted EPS = ($510-27) ÷ (526+6+6)

= $483 ÷ 538 = $0.90

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