Question

On December 31, 2017, Berclair Inc. had 400 million shares of common stock and 14 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2018, Berclair purchased 120 million shares of its common stock as treasury stock. Berclair issued a 6% 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 $700 million.

Also outstanding at December 31 were 63 million incentive stock options granted to key executives on September 13, 2013. The options were exercisable as of September 13, 2017, for 63 million common shares at an exercise price of $60 per share. During 2018, the market price of the common shares averaged $70 per share.

The options were exercised on September 1, 2018.

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 Earning Per Share = (Net Profit - Preference Shares Dividends) / Weighted Average O/s Shares

Weighted Average O/s Shares = 400 (1.06) - 120 (10/12) (1.06) + 4 (3/12) + 63 (4/12) =340

Basic Earning Per Share = (700 - (14 X 9% X 100) / 340

Basic Earning Per Share = (700 - 126) / 340

Basic Earning Per Share = $1.69 per Share (Approx.)

Diluted Earning Per Share = (Net Profit - Preference Shares Dividends) / (Weighted Average O/s Shares + Conversion of any dilutive securities)

(Weighted Average O/s Shares + Conversion of any dilutive securities) = 400 (1.06) - 120 (10/12) (1.06) + 4 (3/12) + 63 (4/12) + (63 - 54**) (8/12)

(Weighted Average O/s Shares + Conversion of any dilutive securities) = 346

** assumed exercise 63 million shrs x $60 exercise price = 3,780 / mkt prc $70 = 54

Diluted Earning Per Share = (700 - 126) / 346

Diluted Earning Per Share = $1.66 per Share (Approx.)