On December 31, 2015, Berclair Inc. had 580 million shares of common stock and 6

Question

On December 31, 2015, Berclair Inc. had 580 million shares of common stock and 6 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 $1,000 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. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Numerator DenominatorEarnings per Share Basic EPS Diluted EPS

Explanation / Answer

Basic EPS=

Numerator:

Net Profit available to holders =

1000 Less 40% tax =600 million

Less : Pref dividend : (9% on 600 mill.) =54 million

Net income a/v to common stock : ( Numerator)

Net income : 1000

Less : 40% tax :(400)

Less : Pref dividend(9% on 600): 54

Earning available to comm. st. : 546 million ( Numerator)

Weighted average of common stock : (Denominator)

580*(2months/12months) = 96.67

556*(4/12) =185.33

583.8*(3/12) = 145.95

587.8*(3/12)= 146.95

Total weighted common stock : 574.89 ( Denominator)

Basic EPS : 546/574.89 =0.9497

Diluted EPS : Adj. Net income ( Numerator)

Adj.no. of weighted common stock : (Denominator)

Numerator : = 549 million

Basic earnings = 546

+ bond interest*(1-t) =5*(1-40%)

=546+3    =549 million

Denominator:

574.89+6 =580.89

Diluted EPS = 549/580.89 =0.945

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