Question

On December 31, 2020, Berclair Inc. had 280 million shares of common stock and 3 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 $250 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

Required answer
	Numerator /	Denominator =	EPS
Basic	223/	274=	0.814
Diluted	226/	286=	0.79

Berclair inc.

Basic EPS = ( net incoome - preference dividend ) / Weighted average number of common shares outstanding.

Weighted average number of common shares outstanding = 280 * 12/12 * 1.05 - 24 * 10/12 * 1.05 + 4 * 3/12 = 294 - 21 + 1 = 274 million shares

( 250 - 3 * 100 * 9 % ) / 274 = 223/ 274 = $ 0.814 per share

Dilutive EPS

Exercisable securities :- Use of treasury stock if dilutive

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

Proceeds recived on exercise = 30 * 56 = 1680 million

Shares repurchased = 1680 / 70 = 24 million

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

EPS with inclusion of options :- 223 / 274 + 6 = $ 0.796 ( this will be used to test the dilutive effect of convertible bonds )

Convertible bonds :- ude the " IF converted" method

Interest not paid net of tax = 50 * 8% * 75 % = $ 3 million

Additional shares on conversion = 6 million

Conversion ratio = 3/6 =0.50

Dilutive because 0.50 is less than 0.796

Dilutive EPS = 223 + 3 / 274 + 6 + 6

226 / 286 = $ 0.79 per share