On December 31, 2017, Dow Steel Corporation had 670,000 shares of common stock a

Question

On December 31, 2017, Dow Steel Corporation had 670,000 shares of common stock and 37,000 shares of 7%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 4% common stock dividend on May 15 and paid cash dividends of $470,000 and $76,000 to common and preferred shareholders, respectively, on December 15, 2018.

On February 28, 2018, Dow sold 51,000 common shares. In keeping with its long-term share repurchase plan, 4,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2018, was $2,450,000. The income tax rate is 40%.
  

Required:
Compute Dow's earnings per share for the year ended December 31, 2018. (Do not round intermediate calculations. Enter your answers in thousands.)

Explanation / Answer

EPS = Profit available to equity share holders / Weighted average number of shares

Calculation of Weighted average number of shares:

Weighted average number of shares = 670000 x 2/12 + 721000 x 4/12 + 717000 x 6/12 = 710,500 shares.

Explanation: 670000 shares are existing for 2 months. Then 51000 shares are sold so it increased to 721000 shares which existed for 4 months. Then 4000 shares are retired so shares reduced to 717000 which existed for 6 months.

Calcaulation of Profit available to equity share holders:

Profit available to equity share holders = Net Income - Preferred dividend = $2,450,000 - $76000 = $2,374,000

Calculation of EPS:

EPS = Profit available to equity share holders / Weighted average number of shares

= $2,374,000 / 710,500

= $3.34

So the EPS for the year ended December 31,2018 = $3.34

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