Question

On December 31, 2017, Berclair Inc. had 400 million shares of common stock and 6 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2018, Berclair purchased 30 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2018. Five million treasury shares were sold on October 1. Net income for the year ended December 31, 2018, was $650 million.

Required:

Compute Berclair's earnings per share for the year ended December 31, 2018. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

Solution

Berclair Inc

Computation of the company’s earnings per share for the year ended December 31, 2018:

Earnings per share = (net income – preferred dividend)/average number of common shares outstanding

Net income for 2018 = $650,000,000

Preference dividend = 9% x $100 x 6,000,000 = $54,000,000

Net income for common share holders = 650,000,000 – 54,000,000 = $596,000,000

Average number of shares outstanding –

Shares outstanding on Dec 31, 2018 = 400,000,000

Add: 5% common stock dividend = 400,000,000 + 5% x 400,000,000 = 420,000,000

Outstanding shares up to Feb 28^th = 420,000,000

Less: treasury stock purchased March 31, 2018 –

Adjustment for 30 million shares purchased on March 31 – 30 million shares up by 5% stock dividend = 30 million x 1.05 = 31,500,000 shares

Shares outstanding from March 1 – Sept 30 (7 months) = 420 million – 31.50 million = 388,500,000 shares

On Oct 1, 5 million treasury shares were sold –

Number of shares outstanding from Oct 1 – Dec 31 , (3 months) = 388.5 M + 5 M = 393,500,000 shares

Average number of shares outstanding for 2018 –

= 420 M (2/12) + 388.5 M (7/12) + 393.5 (3/12) = 395,000,000 shares

Basic earnings per share = $596,000,000/395,000,000 = $1.51 per share