Please explain answer, full points for accuracy. On December 31, 2015, Berclair
ID: 2563149 • Letter: P
Question
Please explain answer, full points for accuracy.
On December 31, 2015, Berclair Inc. had 260 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 $200 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 | | Denominator | = Earnings per Share Basic EPS Diluted EPSExplanation / Answer
a) Basic Earning Per Share = [Net Income - Preferred Dividend]/Weighted average # shares of common stock outstanding Net Income $200 million Preferred dividends = $100 x 9% x 6 million shares $54 million Weighted Average shares Outstanding in millions Weighted Average shares Outstanding Date Number of Shares Stock Dividend Total Shares Weights Number of shares x Weights Jan,1,2016 260 13 273 12/12 273 Mar 1,2016 -24 -1.2 -25.2 10/12 -21 Oct 1,2016 4 4 3/12 1 Weighted average # shares 253 Numerator (Basic EPS): = $200 -$54 million $146 Denominator (Basic EPS): Weighted average # shares of common stock outstanding 253 Basic Earning Per Share = $146 million /253 million shares $0.58 Per share b) Dilutive Earning Per Share = Net Income $200 million Preferred dividends = $100 x 9% x 6 million shares $54 million After tax Interest Savings = $62.5 million x 8% x (1- 40%) $3 million Diluted EPS = Net Income - Preferred Dividend + after-tax interest savings / Weighted Average Shares Outstanding Weighted Average shares Outstanding in thousands Weighted Average shares Outstanding Date Number of Shares Stock Dividend Total Shares Weights Number of shares x Weights Jan,1,2016 260 13 273 12/12 273 Mar 1,2016 -24 -1.2 -25.2 10/12 -21 Oct 1,2016 4 4 3/12 1 Conversion of Bonds = 6 6 Exercise of options (calculated below) 6 6 Total number of shares 265 shares Treasury Stock= 30 million shares - [(30 milion x $56)/$70(average market price)] 6 Numerator (Dilutive EPS): = $200 -$54 + 3 million $149 million Denominator (Basic EPS): Weighted average # shares of common stock outstanding 265 Dilutive Earning Per Share = $149 million /265 million shares $0.56 Per share