Question

On December 31, 2020, 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, 2021, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2021. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2021, was $150 million.

Also outstanding at December 31 were 30 million incentive stock options granted to key executives on September 13, 2016. The options were exercisable as of September 13, 2020, for 30 million common shares at an exercise price of $56 per share. During 2021, the market price of the common shares averaged $70 per share.

Required:

Compute Berclair's basic and diluted earnings per share for the year ended December 31, 2021. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10). Do not round intermediate calculations.)

Answer 1

Basic EPS = (Net profit - Preference Dividend) / Weighted average number of shares

= $150 million - (3 million * 9% * $100) / 190 million shares

= ($150 million - $27 million) / 190 million shares

= 0.6474

Weighted average number of shares = (200 million * 12/12 * 1.05) - (24 million * 10/12 * 1.05) + (4 million * 3/12)

= 210 million - 21 million + 1 million

= 190 million shares

Diluted EPS = (Net profit - Preference Dividend) / Weighted average number of shares + Converted shares

The securities are dilutive since the exercise price of $ 56 is less than the average market price of $70.

Proceeds received = 30 million * $56 = $1,680 million

Shares repurchased = $1,680 million / $70 = 24 million

Net increase in shares outstanding = 30 million - 24 million = 6 million

Diluted EPS = = ($150 million - $27 million) / 190 million shares + 6 million shares

= 0.6276