On December 31, 2012, Berclair Inc. had 200 million shares of common stock and 3
ID: 2425559 • Letter: O
Question
On December 31, 2012, Berclair Inc. had 200 million shares of common stock and 3 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2013, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2013. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2013, was $150 million. Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2008. The options are exercisable as of September 13, 2012, for 30 million common shares at an exercise price of $56 per share. During 2013, the market price of the common shares averaged $70 per share. $62.5 million of 8% bonds, convertible into 6 millions common shares, were issued at face value in 2009.
Required: Compute Berclair's basic and diluted earnings per share for the year ended December 31, 2013.
Explanation / Answer
Net income = $150 million;
Preferred dividends = $27 million (9% x $100 = $9/share x 3 million;
From to shares Period
1/1 – 12/31 200 x (12/12) = 200 x 1.05 = 210 3/1 – 12/31 (24) x (10/12) = (20) x 1.05 =(21)
10/1 – 12/31 4 x (3/12) =
1
Weighted average # shares
190
Basic EPS = ($150 - $27) ÷ 190 = $$0.65
Exercisable Securities, Stock Options
Are they dilutive? Yes because the exercise price of $56/share < the market price of $70/share.
Use the Treasury Stock Method
stock at the average market price, i.e., $1,680 ÷ $70 = 24
3. The net increase in the number of shares = 6 million (30 million issued upon exercise – 24 million repurchased)
Are they dilutive? Is interest net of tax divided by the # shares issued on conversion EPS without assumed conversion?
Interest not paid, net of tax = $3 [(8% x $62.5) x 60%]
# shares issued on conversion = 6 million
$3 ÷ 6 = $0.50
EPS without assumed conversion = ($150 - $27) ÷ (190 + 6) = $0.63 The convertible bonds are dilutive because $0.50 $0.63
If Converted Method.
2. Add back to the numerator the interest, net of tax
Diluted EPS = ($150 - $27 + $3) ÷ (190 + 6 + 6) = $0.62
10/1 – 12/31 4 x (3/12) =
1
Weighted average # shares
190
Basic EPS = ($150 - $27) ÷ 190 = $$0.65
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