Question

At January 1, 2021, Canaday Corporation had outstanding the following securities: 600 million common shares 20 million 6% cumulative preferred shares, $50 par 6. 4% convertible bonds, $2,000 million face amount, convertible into 80 million common shares The following additional information is available: On September 1, 2021, Canaday sold 72 million additional shares of common stock. Incentive stock options to purchase 60 million shares of common stock after July 1, 2020, at $12 per share, were outstanding at the beginning and end of 2021. The average market price of Canaday’s common stock was $18 per share during 2021. Canaday's net income for the year ended December 31, 2021, was $1,476 million. The effective income tax rate was 25%. Required: 1. & 2. Calculate basic and the diluted earnings per common share for the year ended December 31, 2021. (Round "Earnings per share" answers to 2 decimal places. Enter your answers in millions (i. E. , 10,000,000 should be entered as 10). )

Answer 1

To calculate the basic earnings per common share, divide the net income by the weighted average number of common shares outstanding. To calculate the diluted earnings per common share, adjust the weighted average number of common shares to include potential dilutive securities such as convertible bonds and stock options.

Step-by-step explanation:

To calculate the basic earnings per common share for the year ended December 31, 2021, we need to determine the weighted average number of common shares outstanding during the year. We start with the beginning balance of common shares and adjust for any additional shares issued or repurchased during the year.

In this case, we start with 600 million common shares and add 72 million additional shares sold on September 1, 2021. Therefore, the weighted average number of common shares is 672 million (600 million + 72 million).

Next, we calculate the basic earnings per common share by dividing the net income ($1,476 million) by the weighted average number of common shares (672 million). The basic earnings per common share is $2.20.

To calculate the diluted earnings per common share, we need to consider the impact of potential dilutive securities, such as convertible bonds and stock options. In this case, we have 6.4% convertible bonds that are convertible into 80 million common shares. We also have incentive stock options to purchase 60 million shares of common stock. These potential dilutive securities are assumed to be converted or exercised, and the additional shares are included in the calculation.

We calculate the dilutive earnings per common share by adjusting the weighted average number of common shares to include the potential additional shares from the convertible bonds and stock options. In this case, the diluted weighted average number of common shares is 672 million + 80 million + 60 million = 812 million.

Finally, we calculate the diluted earnings per common share by dividing the net income ($1,476 million) by the diluted weighted average number of common shares (812 million). The diluted earnings per common share is $1.82.