On December 31, 2017, Dow Steel Corporation had 600,000 shares of common stock a

Question

On December 31, 2017, Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares of 8%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 4% common stock dividend on May 15 and paid cash dividends of $400,000 and $75,000 to common and preferred shareholders, respectively, on December 15, 2018. On February 28, 2018, Dow sold 60,000 common shares. Also, as a part of a 2017 agreement for the acquisition of Merrill Cable Company, another 23,000 shares (already adjusted for the stock dividend) are to be issued to former Merrill shareholders on December 31, 2019, if Merill's 2019 net income is at least $500,000. In 2018, Merrill's net income was $630,000. In keeping with its long-term share repurchase plan, 2,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2018, was $2,100,000. The income tax rate is 40%. As part of an incentive compensation plan, Dow granted incentive stock options to division managers at December 31 of the current and each of the previous two years. Each option permits its holder to buy one share of common stock at an exercise price equal to market value at the date of grant and can be exercised one year from that date follows: Information concerning the number of options granted and common share prices Share Price Options Granted (adjusted for the stock Date Granted December 31, 2016 December 31, 2017 December 31, 2018 dividend) 8, 000 3, 000 6, 500 $ 24 s 33 s 32 The market price of the common stock averaged $32 per share during 2018. On July 12, 2016, Dow issued $800,000 of convertible 10% bonds at face value. Each $1,000 bond is convertible into 30 common shares (adjusted for the stock dividend) Compute Dow's basic and diluted earnings per share for the year ended December 31. 2018 Enter your answers in

Explanation / Answer

1. Computation of Basic EPS

Basic EPS = (Net Income - Preference dividend) / Weighted Average Shares Outstanding

Net Income = $$210000

Preference Dividend = $75000

Weighted Average Shares Outstanding:

Weighted Average Shares Outstanding = Opening Stock * (1 + Stock Dividend) + Stock Issued in February 28 * Remaining Month in Year / 12 - Stock retired * Remaining Month in Year / 12

Weighted Average Shares Outstanding = 600000 * (1 + 0.05) + 60000 * 10 / 12 - 3000 * 6 / 12

Weighted Average Shares Outstanding = 678500 Shares

Basic EPS = (Net Income - Preference dividend) / Weighted Average Shares Outstanding

Basic EPS = (2100000 - 75000) / 678500

Basic EPS = $2.98 Per Share

2. Diluted EPS

Proceeds received from the option granting in 2016 = 8000 * $24 = $192000

Shares repurchased from the proceeds receiveed from grant issue = Proceeds / Market Price

Shares repurchased from the proceeds receiveed from grant issue = $192000 / $32

Shares repurchased from the proceeds receiveed from grant issue = 6000 Shares

Net change in number of shares = 8000 - 6000 = 2000 Shares

Weighted Average Shares Outstanding = Basic EPS Shares + Net Increase in shares

Weighted Average Shares Outstanding = 678500 + 2000

Weighted Average Shares Outstanding = 680500 Shares

Diluted EPS = (Net Income - Preference dividend) / Weighted Average Shares Outstanding

Diluted EPS = (2100000 - 75000) / 680500

Diluted EPS = $2.98 Per Share or 2.975 Per Share

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