Question

On December 31, 2017, Berclair Inc. had 520 million shares of common stock and 3 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2018, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2018. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2018, was $850 million. The income tax rate is 40%.

Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2013. The options are exercisable as of September 13, 2017, for 30 million common shares at an exercise price of $56 per share. During 2018, the market price of the common shares averaged $70 per share.

In 2014, $62.5 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, 2018. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

Basic EPS
To determine the weighted average common shares outstanding
SHARES ISSUED (in millions)	Time outstanding	Total
520	12/12 (Jan 1 - December 31st)(520*12/12)*1.05	546
-24	10/12 (March 1 - December 31st) (24*10/12)*1.05	-21
	Retroactive adjustment for 5% dividend)	525
4	3/12 October 1 - December 31 (4*3/12)	1
		526
To compute the preferred dividend:
3*100*9%	27	Million
Basic EPS	(Net Income 850 - 27million)/526 million
	1.5646
	1.56	Rounded

2. The Treasury Stock Method assumes that the proceeds received upon exercise of $1,680 (30 million x $56) are used to buy back stock at the average market price, i.e., $1,680 ÷ $70 = 24. 3. The net increase in the number of shares = 6 million (30 million issued upon exercise – 24 million repurchased)

Convertible Securities, Bonds Are they dilutive? Is interest net of tax divided by the # shares issued on conversion ≤ EPS without assumed conversion? Interest not paid, net of tax = $3 [(8% x $62.5) x 60%] # shares issued on conversion = 6 million $3 ÷ 6 = $0.50

EPS without assumed conversion= ($850 - $27) ÷ (526 + 6) = $1.54 The convertible bonds are dilutive because $0.50 ≤ $1.5528

If Converted Method. 1. Assume conversion at the later of the date of issue (2014) or the beginning of the period (1/1/18). Assume conversion 1/1/18 2. Add back to the numerator the interest, net of tax 3. Add to the denominator the weighted average # shares issued on assumed conversion. Diluted EPS = ($850 - $27 + $3) ÷ (526 + 6 + 6) =

1.5353

1.54