On December 31, 2015, Berclair Inc. had 520 million shares of common stock and 3 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 $850 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
Net income = $850 million;
Preferred dividends = $27 million (9% x $100 = $9/share x 3 million; since the preferred stock is cumulative, the dividend is deducted whether or not paid)
Denominator (Basic EPS): Weighted average # shares of common stock outstanding
1/1 – 12/31 520 x (12/12) = 520 x 1.05 = 546
3/1 – 12/31 (24) x (10/12) = (20) x 1 05 = (21)
9/1 – 12/31 30 x (4/12) =10
10/1 – 12/31 4 x (3/12) =1
Now we add all of these
=546+(21) +10+1
=536
Weighted average number of shares = 536
Basic EPS = ($850 – $27) ÷ 536
= $1.53
Exercisable securities, Stock Options are dilutive because in the sum we have been provided with the information that, the exercise price of $56/share which is less then < the market price of $70/share
Now use the Treasury Stock Method
1.
Exercise is assumed to take place at the later of the date of issue (9/13/08) or the beginning of the year (1/1/13). Assume exercise 1/1/13, even though actual exercise occurred on 9/1 2
The Treasury Stock Method assumes that the proceeds received upon exercise of $1,680 (30 million x $56) are used to buy back stock at the average market price,
i.e., $1,680 ÷ $70
= 24
3.
The net increase in the number of shares
= 6 million (30 million issued upon exercise – 24 million repurchased) x 8/12
= 4
Basic EPS = ($850 – $27) ÷ 536 = $1.53
Diluted EPS = ($850 – $27) ÷ (536 + 4) = $1.52
