Caspela Corp. had the same capital structure in 2014 and 2015, consisting of the

Question

Caspela Corp. had the same capital structure in 2014 and 2015, consisting of the following:

Preferred stock, $12 par, 5% cumulative,

20,000 shares issued and outstanding $ 240,000

Common stock, $6 par, 250,000 shares

issued and outstanding 1,500,000

Caspela reported net income of $600,000 for 2014. No preferred dividends were paid during 2014, but Caspela paid $20,000 in preferred dividends in 2015. In its 2015 income statement what amount should Caspela report as basic earnings per share?

a. $2.30

b. $2.32

c. $2.35

d. $2.37

Explanation / Answer

Total dividend paid = $20,000

Dividend for preferred stock for year 2015 = $240,000 * 5% = $12,000

Remaining amount to be paid for arrears to preferred stock for 2014 and to common stock holders = $20.000 - $12,000 = $8,000

Arrears of 2014 to be paid to preferred stockholders = $12,000 limited to $8,000

Income available for commons stockholders = Net income - Dividend paid to preferred stockholders = $600,000 - $20,000 = $580,000

Number of common stock shares outstanding = 250,000 shares

Basic earnings per share = $580,000/250,000 shares = $2.32 per share

Hence, correct answer is b. $2.32 per share

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