On December 31, 2017, Dow Steel Corporation had 790,000 shares of common stock a

Question

On December 31, 2017, Dow Steel Corporation had 790,000 shares of common stock and 49,000 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 $590,000 and $88,000 to common and preferred shareholders, respectively, on December 15, 2018.

On February 28, 2018, Dow sold 72,000 common shares. In keeping with its long-term share repurchase plan, 6,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2018, was $3,050,000. 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 (adjusted for the stock dividend) 26,000 21,000 24,500 Share Price December 31, 2016 December 31, 2017 December 31, 2018 $ 44 $ 53 $ 52 The market price of the common stock averaged $52 per share during 2018

Explanation / Answer

Computation of Weighted Average no of shares as on 31.12.2018 (for Basic EPS) No of shares outstanding on 01-01-2018 790000 No of Shares sold on 28 Feb 2018 72000 72000 * 10/12 60000 Shares Repurchase on 1 July 2018 6000 6000 * 6/12 -3000 Stock dividend shares held on 01-01-2018 790000 * 4% 31600 Stock dividend shares issued on 28-02-2018 60000 * 4% 2400 No of shares outstanding on 31-12-2018 881000 Computation of Basic EPS on 31.12.2018 Total earnings 3050000 Prefence dividend -88000 Earnings available to common share holders 2962000 No of shares outstanding on 31-12-2018 881000 EPS 2962000/881000 3.36 Computation of value of exercisable options as on 31.12.18 26000 * 44 1144000 No of shares for exercisable options (reaquired) 1144000/52 22000 Computation of Weighted Average no of shares as on 31.12.2018 (for Diluted EPS) No of shares outstanding on 01-01-2018 790000 No of Shares sold on 28 Feb 2018 72000 72000 * 10/12 60000 Shares Repurchase on 1 July 2018 6000 6000 * 6/12 -3000 Stock dividend shares held on 01-01-2018 790000 * 4% 31600 Stock dividend shares issued on 28-02-2018 60000 * 4% 2400 No of shares for exercisable options 26000 No of shares for exercisable options (reaquired) -22000 No of shares outstanding on 31-12-2018 885000 Computation of Basic EPS on 31.12.2018 Total earnings 3050000 Prefence dividend -88000 Earnings available to common share holders 2962000 No of shares outstanding on 31-12-2018 885000 Diluted EPS 2962000/885000 3.35 Numerator / Denominator Earnings per share Dow's Basic 2962000 / 881000 3.36 Dow's Diluted 2962000 / 885000 3.35

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