Question

Problem 19-12 EPS; nonconvertible preferred stock; treasury shares; shares sold; stock dividend; options (LO19-4, 19-5, 19-6, 19-7, 19-8, 19-10] On December 31, 2017, 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, 2018. On February 28, 2018, Dow sold 60,000 common shares. 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, 2018, 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 Share Price December 31, 2016 December 31, 2017 December 31, 2018 Options Granted (adjusted for the stock dividend) 8,000 3,000 6,500 $ 24 $ 33 $ 32 The market price of the common stock averaged $32 per share during 2018. Required: Compute Dow's earnings per share for the year ended December 31, 2018. (Enter your answers in thousands.) Numerator 1 Denominator = Earnings per share Dow's basic Dow's diluted

Answer 1

	Numerator	Denominator	EPS
Basic EPS	$       2,025	$              675	$ 3.00
Diluted EPS	$       2,025	$              677	$ 2.99

	Amount
Income	$    2,100,000
Less: Preference Div	$         75,000
Net Income	$    2,025,000

Weighted No: of Shares
31-12-2017	600000*12/12*1.04	624,000
28-02-2018	60000*10/12*1.04	52,000
01-07-2018	(2000*6/12) Retired	-1,000
Weighted No: of Shares		675,000

Diluted Weighted No: of Shares = 675000+(8000-8000*24/32)

Diluted Weighted No: of Shares = 677,000