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Exercise 19-17 (Algo) EPS; stock dividend; nonconvertible preferred stock; treasury shares; shares sold; stock options [LO19-5,...

Exercise 19-17 (Algo) EPS; stock dividend; nonconvertible preferred stock; treasury shares; shares sold; stock options [LO19-5, 19-6, 19-7, 19-8] On December 31, 2020, Berclair Inc. had 320 million shares of common stock and 5 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2021, Berclair purchased 72 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 $450 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, 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. 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.)

Solutions

Expert Solution

Calculate the basic earnings per share:

.

Basic EPS = ( Net Income - Preference share dividend ) / WANCSO*

Where,

Net Income = $450 million

Preference share dividend = 5 million shares of 9%, $100 par value cumulative preferred stock dividend = 5 million * 100 * 9% = 45 million

.

WANCSO = Weighted average number of common share outstanding

Jan 1, 2021 = share outstanding = 320 million

Less: Treasury stock repurchase = 72 million * 10 / 12 = (60 million )

Balance outstanding = 320 million - 60 million = 260 million

Add: stock dividend = of 5% = 260 * 5% = 13 million

On Oct 1 - reissue of treasury stock = 4 million * 3 / 12 = 1 million

WANCSO = 260 + 13 + 1 = 274 million share

.

Basic EPS = ( 450 million - 45 million ) / 274 million

Basic EPS = 405 million / 274 million

Basic EPS = $1.48 per share

.

Calculate the Diluted Earnings per share:

First calculate the number of share that issue new share related to option

Option issued = 30 million @ 56 per share = 1680 million

Can repurchase = 1680 million / 70 per share = 24 million share

New issue related to option = 30 million - 24 million = 6 million

Potential new issue of share related to option = 6 million

Add this new number of issue of share to with WANCSO

.

*Here the preference share was not convertible, so does not consider this.

.

Option are dilutive, only effect in denominator

.

Diluted EPS = ( Net Income - Preference share dividend ) / WANCSO + potential new issue of share )

.

Diluted EPS = ( 450 million - 45 million ) / ( 274 million + 6 million )

Diluted EPS = 405 million / 280 million

Diluted EPS = $1.45 per share

ekkarill92 answered 2 years ago
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