Question

On December 31, 2020, Berclair Inc. had 380 million shares of common stock and 4 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2021, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2021. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2021, was $500 million. The income tax rate is 25%.

Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2016. The options are exercisable as of September 13, 2020, for 30 million common shares at an exercise price of $56 per share. During 2021, the market price of the common shares averaged $70 per share.

In 2017, $50.0 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, 2021. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10). Do not round intermediate calculations.)

Answer 1

Ans:

Basic EPS = (Net profit - Preference Dividend) / Weighted average number of shares

= $500 million - (4 million * 9% * $100) / 379 million shares

= ($500 million - $36 million) / 379 million shares

= 1.22

Weighted average number of shares = (380 million * 12/12 * 1.05) - (24 million * 10/12 * 1.05) + (4 million * 3/12)

= 399 million - 21 million + 1 million

= 379 million shares

Diluted EPS = (Net profit - Preference Dividend) / Weighted average number of shares + Converted shares

The securities are dilutive since the exercise price of $ 56 is less than the average market price of $70.

Proceeds received = 30 million * $56 = $1,680 million

Shares repurchased = $1,680 million / $70 = 24 million

Net increase in shares outstanding = 30 million - 24 million = 6 million

Diluted EPS = = ($500 million - $36 million+3*)) / 379 million shares +** 6 Millions +**** 6 million shares
=467/391

=1.19
*After tax interest saving (50 * 8% * 75%)=3
**Exercise of option [30 - (30*56/70)]   =6
**** Conversion of bonds=6