Question

On December 31, 2017, Berclair Inc. had 600 million shares of common stock and 17 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2018, Berclair purchased 120 million shares of its common stock as treasury stock. Berclair issued a 6% 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 $850 million.

Also outstanding at December 31 were 72 million incentive stock options granted to key executives on September 13, 2013. The options were exercisable as of September 13, 2017, for 72 million common shares at an exercise price of $60 per share. During 2018, the market price of the common shares averaged $90 per share. The options were exercised on September 1, 2018. Required: Compute Berclair’s basic and diluted earnings per share for the year ended December 31, 2018.

Answer 1

Basic EPS

Basic EPS = (Net income - Preference dividend) / weighted average common shares

To calculate weighted average common shares outstanding

Shares issued in million	Outstanding	Total
600	12/12 (Jan - Dec)	600
-120	10/12 (Mar - Dec)	-100
	Retroactive Adjustment for 6% Dividend	530
4	3/12 (OCt - Dec)	1
	Weighted average common shares	531

Computation of preference dividend

17 x $100 x 9% = 153 million

Hence,

Basic EPS = (Net income - Preference dividend) / weighted average common shares

EPS = (850 - 183)/531

= $1.31

Diluted EPS

Determine the treasury shares

$72 million shares x $60 per shares = $4320 million

$4320 / $90 market price = $48 million shares

Therefore the stock option would be

72 million - 48 million = 24 million

hence, diluted EPS = (850 - 153)/ (531 + 24)

= $1.25