Question

On December 31, 2020, Berclair Inc. had 500 million shares of common stock and 6 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2021, Berclair purchased 144 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 $900 million.

Also outstanding at December 31 were 30 million incentive stock options granted to key executives on September 13, 2013. 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

The Formula for Calculation of Basic & Diluted Earnings per share are as follows.

Basic Earning Per Share (EPS)= Earnings / Number of Shares outstanding

Diluted Earnings Per Shares (DEPS)=Adjusted Earnings / Number of Shares Outstandings.

Earnings means Net Income

Adjusted Earnings means Net Income less Dividend paid if any

Number of Shares Outstanding means in the case of BEPS it is the issued and outstanding Common shares of the Company whereas in case of DEPS it imputes the impact of Common Shares Price, Preferred Shares, Stock options, Warrants, Partially convertible debts, fully convertible debts etc....

EPS = Net Income - Dividend on Prefered Stock / Number of  Outstanding Shares

= $ 900 Million - $54 Million (dividend on Prefernce share)/ 408Million Share (calculated as follows)

= $846 Million/ 408 Million

=$2.07 per share

Earning Per Share =$ 2.07per Share

Number of shares calculated as follows.

1) Number of Common Stock 500 Million

2) Tresury Stock Bought back 144 Million

2 i) Less Sold in open Market 4 Million 140 Million

3) Add :- 5% Common Stock Dividend issued 18Million ( 5% of (500-140= 360))

4) Add :- Option Exercise by Key Executives 30 Million  

Total Shares outstanding 408 Million

Diluted Earning Per Share = Net Income - Dividend on Preferred Stock /Weighted Average number of common stock + conversion of diluted securities.

Net Income after dividend is 846 Million ($ 900 Million -54 Million as Prefered Dividend)

Weighted Average number of Common Stock are determined according to the number of days it was held which is calculated as follows.

Date	Number of Shares	Month	Weighted Average Number of Shares
31.12.2020	500	12	500.00
Less :- 01.03.2021	144	10	120
Add :- 01.07.2020	18	6	9
Less :- 01.10.2020	4	3	1
Add :- 13.09.20	30	15	37.5
	400.00		425.50

As there were no securities which are converted into Equity hence no stock were added to above weighted average number of shares.

therefore DEPS= $ 846 Million/ 425.50

= $ 1.98 per Share