12. On December 3 1 , 2013 . Case Solutions had 600,000 shares of common stock a

Question

12. On December 3 1 , 2013 . Case Solutions had 600,000 shares of common stock and 200,000 shares of 500. noncumulative, nonconvertible S5 par preferred stock issued and outstanding. On May 1, 2014, Case sold 150,000 common shares. In keeping with its long-term share repurchase plan 30,000 shares were retired on September 30. Case distributed a 5% common stock dividend on July 1, Case's net income for the year ended December 31, 2014, was $800.000 IThe company paid cash dividends of $50,000 to preferred shareholders on December 31, 2014 The tax rate is 40%. What is Case's basic earnings per share for the year ended December 31, 2014? [Sol oo o??B/12 y i 'OS 0??112 ?10Si oco (7 500) 30100 2) S6o 416

Explanation / Answer

Basic earnings per Share is computed as:

(Net Income - Preferred Stock Dividend)/Weighted Shares outstanding

The amount of cash dividends paid is not what matters, but the actual dividend for the year, which is 5% X 200,000 = $10,000

This is because the cash dividends could include payments for dividend relating to prior periods.

Hence the Net Income - Preferred Stock Dividend = $800,000 - $10,000 = $790,000

The weighted average outstanding common stock is :

weighted average stock outstanding = ((600,000 X 4) + (750,000 X 5) + (720,000 X 3))/12 = 692,500

Hence the Basic earning per share = 790,000/692,500 = $1.14 per share

Date Action Outstanding Stock Number of Months 01-01-2014 Opening - 600,000       600,000 4 01-May-14 New Shares Sold - 150,000       750,000 5 30-Sep-14 Shares Retired - 30,000       720,000 3

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