Question

On December 31, 2020, Berclair Inc. had 480 million shares of common stock and 18 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2021, Berclair purchased 120 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 $900 million.

Also outstanding at December 31 were 63 million incentive stock options granted to key executives on September 13, 2016. The options were exercisable as of September 13, 2020, for 63 million common shares at an exercise price of $60 per share. During 2021, the market price of the common shares averaged $70 per share.

The options were exercised on September 1, 2021.

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

Answer:

Net Income =	900	million
Preferred dividend ($100 × 9%) × 18 million =	162	million
Weighted Avg. shares of common stock outstanding:
1/1 - 12/31 480 × (12/12) = 480 × 1.05 =	504
3/1 - 12/31 480 × (10/12) = 120 × 1.05 =	(126)
10/1 - 12/31 4 × (3/12) =	1
Weighted average number of shares =	379
Basis EPS = ($900 - 162) / 379 =$1.95
The stock options are dilutive because the erercise price of $60 is less than the market price of $70
Proceed received upon exercise (63 million × $60) = $3,780 million
As per Treasury Stock Method Proceed received upon exercise
is used to buy back stock at the average market price.
No. of shares repurchased = $3,780 / $70 = 54 million
Net increase in the no. shares = 63 million - 54 million = 9 million
Weighted avg. no. of shares = 9 million × (4/12) =	3 million
Diluted EPS = ($900 - 162) / (379 + 3) = $1.93