One way of improving a company€™s EPS is to reduce the number of shares outstanding. Access the financial statements for BCE Inc. for the year ended December 31, 2009, from the company€™s website or SEDAR. Excerpts from the 2006 financial statements have also been provided below:
Note 10: Earnings Per Share
The following table is a reconciliation of the numerator and the denominator used in the calculation of basic and diluted earnings per common share from continuing operations.

(1) The calculation of the assumed exercise of stock options includes the effect of the average unrecognized future compensation cost of dilutive options. It does not include anti-dilutive options. These are options that would not be exercised because their exercise price is higher than the average market value of a BCE Inc. common share for each of the periods shown in the table. The number of excluded options was 18,479,608 in 2006, 24,466,767 in 2005 and 26,693,305 in 2004.

Instructions
(a) What per share information has the company provided each year? (b) What types of shares does the company have outstanding? What are the dividend payments required on these shares?
(c) How have the earnings from continuing operations been determined for each year from 2004 to 2009? Why has this adjustment been made? Why did the earnings for 2007 and 2006 change significantly from the other years presented?
(d) What has the weighted average number of shares been each year for the period 2004 to 2009 for the basic EPS? Why does this change from year to year? Recalculate the basic earnings per share from continuing operations as if the weighted average number of shares outstanding had remained the same since 2004. Assuming that the company's share price trades at around 12 times earnings, what has been the impact each year of the reduction in the number of shares on the share price?
(e) Review the calculation of the diluted earnings per share. What has caused the dilution impact? What has been excluded from the calculation and why?

Transcribed Image Text:

2006 2005 2004 Earnings from continuing operations (numerator) Earnings from continuing operations Dividends on preferred shares 1,891 1,834 1,395 70) (70) (70) 1,821 1,764 1,325 Earnings from continuing operations basic Weighted average number of common shares outstanding (denominator) (in millions) Weighted average number of common shares outstanding basic 861.4 926.8 924.6 Assumed exercise of stock options) Weighted average number of common shares outstanding diluted 861.6 927.1 925.2 0.2 0.3 0.6 10 Net earnings per common share Continuing operations Discontinued operations Extraordinary gain basic 2.12 1.90 1.44 0.13 0.140.14 0.07 2.25 2.04 1.65 Net earnings Net earnings per common share - diluted Continuing operations Discontinued operations Extraordinary gain 10 2.12 1.90 1.44 0.13 0.140.14 0.07 2.25 2.04 1.65 1.32 1.32 1.20 861.4 926.8 924.6 Net earnings Dividends per common share Average number of common shares outstanding basic (milions)