At January 1, 2021, Canaday Corporation had outstanding the following securities: 690 million common shares 20...

At January 1, 2021, Canaday Corporation had outstanding the following securities:

690 million common shares
20 million 5% cumulative preferred shares, $50 par
6.4% convertible bonds, $3,000 million face amount, convertible into 60 million common shares

The following additional information is available:

On September 1, 2021, Canaday sold 72 million additional shares of common stock.
Incentive stock options to purchase 40 million shares of common stock after July 1, 2020, at $14 per share, were outstanding at the beginning and end of 2021. The average market price of Canaday’s common stock was $20 per share during 2021.
Canaday's net income for the year ended December 31, 2021, was $2,366 million. The effective income tax rate was 25%.

Required:
1. & 2. Calculate basic and the diluted earnings per common share for the year ended December 31, 2021. (Round "Earnings per share" answers to 2 decimal places. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Numerator	/	Denominator	=	Earnings per share
Basic		/		=
Diluted		/		=

Expert Solution

Answer:

Computation of Basic EPS:
Numerator (Basic EPS)
Net Income = 2366
Less: Preferred Dividends (20*50*5%) = -50
Numerator (Basic EPS) = 2316

Denominator (Weighted Average no of shares outstanding)

Number of shares o/s	01/01-12/31	690*12/12	690
Additional shares	09/01-12/31	72*4/12	24
Weighted average no of shares			714
Basic EPS = 2316/714	3.24

Diluted EPS

Stock options are dilutive because the exercise price of 14 is less than the average market price of 20 proceeds received on exercise = 40 million x 14 = 560 million shares repurchased = 560 million / 20= 28 million

Net Increase in shares outstanding (40 million - 28 million) = 12 million

Convertible Bonds:

Interest not to be paid net of tax = 3000*6.4% * (1-0.25) = 144 million
Additional shares on conversion = 60 million
Conversion ratio = 144/60 = 2.4

Diluted because 2.4 is less than the 3.24
Diluted EPS = (2366-50+144) / (714+12+60) = 3.13

ekkarill92 answered 1 year ago

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