# 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