At January 1, 2016, Canaday Corporation had outstanding the following securities: 650 million...

Question:

At January 1, 2016, Canaday Corporation had outstanding the following securities: 650 million common shares 25 million 6% cumulative preferred shares, $50 par 4% convertible bonds, $3,000 million face amount, convertible into 50 million common shares The following additional information is available:

  • On September 1, 2016, Canaday sold 69 million additional shares of common stock.
  • Incentive stock options to purchase 80 million shares of common stock after July 1, 2015, at $10 per share were outstanding at the beginning and end of 2016. The average market price of Canaday's common stock was $16 per share during 2016.
  • Canaday's net income for the year ended December 31, 2016, was $1,496 million. The effective income tax rate was 40%.

Required: 1. & 2. Calculate basic and diluted earnings per common share for the year ended December 31, 2016. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Bonds:

A bond is an instrument on which fixed income is received by the investors. Bonds are generally issued by corporations or governments to raise money in case of need.

Answer and Explanation:

{eq}\begin{align*} {\rm\text{Basic Earnings per Common Share}} &= \dfrac{{{\rm\text{Net Income}} - {\rm\text{Preference Dividend}}}}{{{\rm\text{Shares at Jan1}} + {\rm\text{New Shares}}}}\\ &= \dfrac{{\$ 1,496 - \$ 75}}{{650\,{\rm\text{million}}\,{\rm\text{shares}} + \left( {69\,{\rm\text{million}}\,{\rm\text{shares}} \times \dfrac{4}{{12}}} \right)}}\\ &= \dfrac{{\$ 1,421}}{{673\,{\rm\text{million}}\,{\rm\text{shares}}}}\\ &= \$ 2.11 \end{align*} {/eq}


{eq}\begin{align*} {\rm\text{Diluted Earning per Common Share}} &= \dfrac{{{\rm\text{Net Income}} - {\rm\text{Preference Dividend}} + {\rm\text{After tax Interest Saving}}}}{{{\rm\text{Shares at Jan1}} + {\rm\text{New Shares}} + {\rm\text{Exercise of Option}} + {\rm\text{Conversion of Bonds}}}}\\ &= \dfrac{{\$ 1,496 - \$ 75 + \$ 72}}{{650\,{\rm\text{million}}\,{\rm\text{shares}} + \left( {69\,{\rm\text{million}}\,{\rm\text{shares}} \times \dfrac{4}{{12}}} \right) + \left( {80\,{\rm\text{million}}\,{\rm\text{shares}} - 50\,{\rm\text{million}}\,{\rm\text{shares}}} \right) + 50\,{\rm\text{million}}\,{\rm\text{shares}}}}\\ &= \dfrac{{\$ 1,493}}{{753\,{\rm\text{million}}\,{\rm\text{shares}}}}\\ &= \$ 1.98 \end{align*} {/eq}


Working Notes:

{eq}\begin{align*} {\rm\text{Preference Dividend }} &= \left( {{\rm\text{Preference Shares}} \times {\rm\text{Cost per share}}} \right) \times {\rm\text{Dividend Rate}}\\ &= \left( {25\,{\rm\text{million}} \times {\rm\text{\$ 50 per share}}} \right) \times 6\% \\ &= \$ 75 \end{align*} {/eq}


{eq}\begin{align*} {\rm\text{After Tax Saving}} &= {\rm\text{Interest Amount on Bond}} - \left( {{\rm\text{Interest Amount on Bond }} \times {\rm\text{Tax Rate}}} \right)\\ &= \left( {\$ 3,000\,{\rm\text{million}} \times 4{\rm\text{% }}} \right) - \left( {\$ 3,000\,{\rm\text{million}} \times 4{\rm\text{% }} \times 40\% } \right)\\ &= \$ 120 - \left( {\$ 120 \times 40\% } \right)\\ &= \$ 120 - \$ 48\\ &= \$ 72 \end{align*} {/eq}


Computation of Treasury Shares

Particulars Amount$
Shares 80 million
Multiply Exercise Price $10
Proceeds $800 million
Divided Average Market Share Price $16
Treasury Shares 50 million

Learn more about this topic:

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How to Calculate Earnings Per Share: Definition & Formula

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 14
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