On December 31, 2015, Berclair Inc. had 520 million shares of common stock and 3

Question

On December 31, 2015, 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, 2016, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2016. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2016, 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, 2011. The options are exercisable as of September 13, 2015, for 30 million common shares at an exercise price of $56 per share. During 2016, the market price of the common shares averaged $70 per share. In 2012 $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, 2016.

Explanation / Answer

EPS = net income / weighted average no of shares

weighted average no of shares

1 Jan Common stock = 5200 *1 = 520

Less 1 march Treasury stock = 24 *10 /12 = (20)

Add 1 July Common stock dividend @10% = 50

Add 1 Oct Treasury stock sold = 4 * 3/12 = 1

Total = 520 -20 +50 +1 = 551 mn shares

Basic EPS = net income - tax - preferred dividend / Weighted average no shares

= 850 - 40% of 850 - 9% of 3mn preferred stock / 551 = 509.73 / 551 = 0.9251 per share

For diluted EPS , we calculate all the potentially dilutive options

1)Employee stock option = no of shares offered * excercise price / average price

= 30 * 56 / 70 = 24 mn shares ,

So, 24 mn shares can be bought back from the market, the company needs to issue balance = 30 - 24 = 6mn shares from the treasury stock

we assume the stock option is not yet excercised

2) Preferred stock - not considered dilutive , since it is not mentioned that it is convertible into common stock.

3) Bonds

If the interest net of tax / no of bonds converted in stock ,is less than the basic EPS, then it is considered dilutive in nature

= 62.5 mn * 8% ( 1- 40%) / 6 = 0.50 which is less than the basic EPS so it is dilutive in nature

Dilutive EPS = Net income - tax - Preffered Dividend + interest on bonds / weighted average no of shares + employee stock option + Convertible bonds

= 850 - 40% of 850 - 9% on 3 mn +62.5mn * 8% * (1-40%) / 551 + 6 + 6 = 512.73/563

= 0.9107

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.