On December 31, 2015, Berclair Inc. had 400 million shares of common stock and 1

Question

On December 31, 2015, Berclair Inc. had 400 million shares of common stock and 14 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2016, Berclair purchased 120 million shares of its common stock as treasury stock. Berclair issued a 6% 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 $700 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 63 million common shares at an exercise price of $60 per share. During 2016, the market price of the common shares averaged $70 per share. The options were exercised on September 1, 2016.

Explanation / Answer

1). Basic Earnings per share (EPS) :-

Net Income = $700 million

Preferred Dividends = 14 million shares * 100 * 9% = $126 million

Weighted Average number of shares :-

EPS = (Net Income - Preferred Dividends)/ Weighted Average number of Shares

= ($700 - $126)/325 shares (in million)

= $1.77

Dilutive Earnings per share :-

= (Net income - Preferred Dividends)/(Weighted average number of shares + All dilutive potential shares)

= ($700 - $126) / (325 - 57)

= $574 / 268

= $2.14

All Dilutive Potential Shares = (63 million shares - 120 million shares)

= -57 million shares

Number of shares 400 million shares * (12/12) 400 million shares Stock Dividend 400 * 6% 24 million shares Less : Treasury Stock 120 million shares * 10/12 (100) million shares Add : Treasury Stock Sold 4 million shares * 3/12 1 million shares Total Weighted Average shares (400+24-100+1) 325 million shares

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