Question

On December 31, 2020, Berclair Inc. had 250 million shares of common stock and 10 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2021, Berclair purchased 90 million shares of its common stock as treasury stock. Berclair issued a 4% 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 $500 million.

Also outstanding at December 31 were 45 million incentive stock options granted to key executives on September 13, 2016. The options were exercisable as of September 13, 2020, for 45 million common shares at an exercise price of $50 per share. During 2021, the market price of the common shares averaged $75 per share. The options were exercised on September 1, 2021.

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

a)
Basic Earning Per Share = [Net Income - Preferred Dividend]/Weighted average # shares of common stock outstanding
Net Income	$500	million
Preferred dividends = $100 x 9% x 10 million shares	$90	million
Weighted Average shares Outstanding	in millions				Weighted Average shares Outstanding
Date	Number of Shares	Stock Dividend	Total Shares	Weights	Number of shares x Weights
Jan,1,2021	250	10	260	12/12	260
Mar 1,2021	-90	-3.6	-93.6	10/12	-78
Oct 1,2021	4		4	3/12	1
Weighted average # shares					183
Numerator (Basic EPS): = $500 -$90 million	$410
Denominator (Basic EPS): Weighted average # shares of common stock outstanding	183	shares
Basic Earning Per Share = $410 million /183million shares	$2.24	Per share
b)
Dilutive Earning Per Share =
Net Income	$500	million
Preferred dividends = $100 x 9% x 10 million shares	$90	million
Diluted EPS = Net Income - Preferred Dividend / Weighted Average Shares Outstanding
Weighted Average shares Outstanding	in Millions				Weighted Average shares Outstanding
Date	Number of Shares	Stock Dividend	Total Shares	Weights	Number of shares x Weights
Jan,1,2018	250	10	260	12/12	260
Mar 1,2018	-90	-3.6	-93.6	10/12	-78
Oct 1,2018	4		4	3/12	1
Exercise of options (calculated below)			15		15
				Total number of shares	198
# shares issued on conversion = 45 million shares - [(45 milion x $50)/$75(average market price)]	15
The Treasury Stock Method assumes that the proceeds received upon exercise of $ 2250 (45 million x $50) are used to buy back stock at the average market price, i.e., $2250 ÷ $75 = 30 . The net increase in the number of shares = 15 million (45million issued upon exercise – 30 million repurchased)
Numerator (Dilutive EPS): = $500 -$90 million	$410	million
Denominator (Basic EPS): Weighted average # shares of common stock outstanding	198	shares
Dilutive Earning Per Share = $410 million /198 million shares	$2.07	Per share