Question

On December 31, 2015, Berclair Inc. had 600 million shares of common stock and 17 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2016, Berclair purchased 120 million shares of its common stock as treasury stock. Berclair issued a 6% common stock dividend on July 1, 2016. four million treasury shares were sold on October 1. Net income for the year ended December 31, 2016, was $850 million.

Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2011. The options were exercisable as of September 13, 2015, for 72 million common shares at an exercise price of $60 per share. During 2016, the market price of the common shares averaged $90 per share.

The options were exercised on September 1, 2016.

Required:
Compute Berclair’s basic and diluted earnings per share for the year ended December 31, 2016. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

Please find steps to compute Basic and Diluted EPS:

Step 1: Compute Weighted Average Common Stock Outstanding (in million)

(a) Shares Outstanding from Jan 1 to Dec 31 [600 *12/12] = 600

(b) Shares Purchased as treasury Stock on March 01 [120 *10/12]                             = (100)

(c) Adjustment for issue of 6% Common Stock Dividend (a+b)*6% = 30

(d) Sales of Treasury Stock on October 01 [4 *3/12] = 1

(e) Exercise of Incentive Stock Option on Sept 1 [72 *4/12]                                          = 24       

Weighted Average of Common Stock (a+b+c+d+e) =555

Step 2: Compute Preference Dividend

(a) No. Of Cumulative Preferred Stock = 17

(b) Par Value =100$

(c) Rate = 9%

Dividend [(a*b*c) = 153

Step 3: Compute Basic EPS

(a) Net Income = 850

(b) Dividend = 153

(c) Weighted Average of Common Stock = 555

Basic EPS =(a-b)/(c) =1.26 (approx.)

Diluted EPS:

(a) No. of Stock Options = 72 million shares

(b) Exercise Price = 60

(c) Market Price = 90

(d) Treasury Shares (a*b) / 90 = 48 million shares

It is assumed that the amount received from exercise of options has been used in buy back of shares (treasury shares).

Therefore Incremental Stock Outstanding [72-48] = 24

Weighted Average of Common Stock = 555+24*8/12 = 571

Diluted EPS = (850-153)/571 = 1.22 (approx.)