Question

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

710 million common shares
20 million 5% cumulative preferred shares, $50 par
6.4% convertible bonds, $4,000 million face amount, convertible into 80 million common shares

The following additional information is available:

• On September 1, 2021, Canaday sold 78 million additional shares of common stock.
• Incentive stock options to purchase 60 million shares of common stock after July 1, 2020, at $12 per share, were outstanding at the beginning and end of 2021. The average market price of Canaday’s common stock was $18 per share during 2021.
• Canaday's net income for the year ended December 31, 2021, was $2,374 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).)

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

710 million common shares
20 million 5% cumulative preferred shares, $50 par
6.4% convertible bonds, $4,000 million face amount, convertible into 80 million common shares

The following additional information is available:

• On September 1, 2021, Canaday sold 78 million additional shares of common stock.
• Incentive stock options to purchase 60 million shares of common stock after July 1, 2020, at $12 per share, were outstanding at the beginning and end of 2021. The average market price of Canaday’s common stock was $18 per share during 2021.
• Canaday's net income for the year ended December 31, 2021, was $2,374 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).)

Answer 1

Basic EPS = Income for common stock holders / Weighted average number of outstanding shares

= $2,323 / 736

= 3.16

Diluted EPS = (Income for common stock holders + Interest saving) / (Weighted average number of outstanding shares + no. of share from dilutive securities)

= ($2,323 + 192) / (736+100)

= $2,515 / 836

= 3.01

Working

Calculation of Income for common stock holders

	Amount (Million)	Working
Net Income	2,374
Less: Preferred Dividend	(50)	(20 * $50 * 5%)
Net Income available to equity shareholders	2,323

Calculation of Weighted Average number of Outstanding shares

	No of Shares	Working
Beginning Shares	710 million
Add: Shares Issued on September 1, 2021	26 million	(78 million * 4 months /12)
Weighted average number of outstanding shares	736 million

Calculation of No. of shares from Dilutive Securities

	No of Shares	Working
Convertible Bonds	80 million
Add: Incentive Options	20 million	(60 million - (60*12/18)
No. of shares from dilutive securities	100 million

Calculation of Saving on Interest from convertible bonds

Interest saving = (4,000 million X 6.4% X (1-0.25))

= $192 million

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