On December 31, 2017, Berclair Inc. had 200 million shares of common stock and 3

Question

On December 31, 2017, 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, 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 $150 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).)

Explanation / Answer

Solution: Calculation of Basic EPS and diluted EPS:

Numerator (basic EPS): Net income = $150 million

Preferred dividends = $100*9%*3 million shares

= $27 million

Denominator (basic EPS): Weighted Average shares of common stock outstanding = [200*(12/12)*1.05] - [(24)*(10/12)*1.05] + [4*(3/12)] = 190

Basic EPS = (150-27)/190 = $0.65

Interest not paid, net of tax = 3*[(8%*62.5)*60%] = $3

Shares issued on conversion = 6 million

Diluted EPS = (150-27+3)/(190+6+6) = $0.62

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