Question

On December 31, 2017, Berclair Inc. had 360 million shares of common stock and 3 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2018, Berclair purchased 88 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2018. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2018, was $550 million. Also outstanding at December 31 were 30 million incentive stock options granted to key executives on September 13, 2013. The options were exercisable as of September 13, 2017, for 30 million common shares at an exercise price of $56 per share. During 2018, the market price of the common shares averaged $70 per share. Required: Compute Berclair's basic and diluted 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

Basic EPS:

numerator = net income $550 less preffered dividend = 27 million( 9% × $100 = $9/ share × 3 = $27million since the preferred stock is cumulative, the dividend is deducted whether or not paid)

Denominator = weighted average shares of share outstanding.

Jan 1 to dec 31 = 360 × (12/12) = 360 × 1.05 = 378

Less:Mar. 1 to dec 31 = 88 × (10/12) = 73.33 × 1.05 = (77)

Add: Oct. 1 to dec 31 = 4 × (3/12) = 1

Weighted average shares = 302

Basic EPS = ($550 - $27)÷302 = 1.732

Diluted EPS =

Using treasury stock

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 million

The calculation of diluted EPS assumes that the shares specified by stock options were issued at the exercise price and that the proceeds wereused to buy back (as treasury stock) as many of those shares as can bepurchased at the market price during the period.

Therefore the net increase in the number of shares = 30 - 24 = 6 million

The stock option were outstanding the entire year therefore we do not weight this amount.

Their was no change in the numerator figure so the diluted EPS is:

= ($550 - $27)÷ (302 + 6)

= 1.698

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