Question

On December 31, 2017, Dow Steel Corporation had 770,000 shares of common stock and 47,000 shares of 9%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 5% common stock dividend on May 15 and paid cash dividends of $570,000 and $86,000 to common and preferred shareholders, respectively, on December 15, 2018. On February 28, 2018, Dow sold 68,000 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 $2,950,000. The income tax rate is 40%. Required: Compute Dow's earnings per share for the year ended December 31, 2018.

Answer 1

Answer:

EPS = 3.37

Explanation:

First step we will calculate the income after paying the preferred dividends

net income 2,950,000

86,000 preferred stock dividends

earnings for common stock: 2,864,000

Then we calcualte the average shares outstanding

Feb 28th 68,000 sold shares

May 15th 770,000 x 5% = 38,500 new shares

July 1st 4,000 shares retired

weighted average shares:

770,000 +68,000 x 10/12 + 38,500 x 7.5/12 - 4,000 x 6/12  = 848729.1667

average shares 848,729

Earning per share

(net income - preferred stock) / weighted average shares outstanding

2,864,000 / 848,729 = 3,.744 = 3.37