On December 31, 2017, Berclair Inc. had 600 million shares of common stock and 1

Question

On December 31, 2017, 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, 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 $850 million Also outstanding at December 31 were 72 million incentive stock options granted to key executives on September 13, 2013. The options were exercisable as of September 13, 2017, for 72 million common shares at an exercise price of $60 per share. During 2018 the market price of the common shares averaged $90 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 es 10).) Answer is complete but not entirely correct. arnings per Numerator 697 697 Denominator - Basic EPS Diluted EPS 531 1.31 1.26

Explanation / Answer

Berclair's Basic earning per share Basic earning per share =        Net income - dividends on preffered shares                                                                         Weighted average number of common stock outstanding Net income = $850 million Dividends on preferred shares = $1700 million x 9%                                                                = $153 million (since the preferred shares are cumulative, dividends paid or not it has to be deducted from net income) Weighted average number of common stock outstanding Common stock on 1/1/2018 to 31/12/2018 =       600 x (12/12) = 600 x 1.06 = 636 Treasury stock purchased on 1/3/2018        =   (120) x (10/12) = 120 x 1.06 = (126) Incentive stock option on 1/9/2018              =    72 x (4/12) =                                   24 Treasury stock sold on 1/10/2018                  =    4 x (3/12) =                                       1 Weighted average number of common stock outstanding                            = 535 Basic EPS = (850 - 153)/535 = $1.30 Diluted EPS Incentive stock options are dilutive in nature as exercise price of $60 is less then the market price of $90 We will use treasury stock method 1. Assume the option is exercised on 1/1/2018, even though it is actually exercised in Sep, 2018 2. The treasury stock method assumes that the proceeds received from exercise of option $4,320 million (72 million x $60 per share) is used to buy back shares at market price i.e. $4,320 million / $90 per share = 48 million shares 3. The net increase in the number of shares = 70 million - 48 million = 22 million Weighted average = 22 x (8/12) = 14.67 rounded to 15 Diluted EPS = (850-153) / (535+15) = $1.27

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