On December 31, 2015, Dow Steel Corporation had 600,000 shares of common stock a

Question

On December 31, 2015, 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, 2016. On February 28, 2016, Dow sold 60,000 common shares. Also, as a part of a 2015 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, 2017, if Merrill's 2017 net income is at least $500,000. In 2016, 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, 2016, 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. Information concerning the number of options granted and common share prices follows: Date Granted Options Granted Share Price (adjusted for the stock dividend) December 31, 2014 8,000 $ 24 December 31, 2015 3,000 $ 33 December 31, 2016 6,500 $ 32 The market price of the common stock averaged $32 per share during 2016. On July 12, 2014, 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).

Explanation / Answer

Numerator( Basic EPS) = Net Income $2,100,000 less Preference Dividend $75,000(Include dividend that are actually paid because preffered stock are non cumulative). =

Denominator(( Basic EPS)

Basic EPS =($2,100,000 -$75,000)/675,000 shares= $3 per share

Stock Option - Use treasury stock method if dilutive

8000 options issued on 12/31/14 with excercise price of $24.

1. They are dilutive because excercise price of $24 is < market price$32. Assume excersice later of the date of issue 12/31/14 or the begining of the year 1/1/16

2.Proceeds received upon excercise ($24*8000) =$192,000

3.Shares purchased at current market price = $192,000/$32 =6000 shares

4. Net increase in shares = 8000-6000= 2000 shares

3000 option issued 12/31/15 with excersice price of of $33.

1. They are not dilutive as excersice price of of $33 >market price$32. So ignore it.

6500 option issued 12/31/16 with excersice price of of $32.

1. They are not dilutive as excersice price of of $32 = market price$32. So ignore it.

Diluted EPS =($2,100,000 -$75,000+($80,000*-($80,000*0.4))/(675,000+2000 +convertible shares24000+23000contigent shares) shares

=$2073,000/724000 shares = $2.86 per share

Weighted average shares of common outstanding Perios weight 1/1 -12/31 600,000*(12/12) =600,000(1.04) =    624,000 2/28-12/31 60,000*(10/12)=50,000*(1.04)=      52,000 7/1-12/31 (2000)*(6/12)      (1,000) Weighted average shares    675,000

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