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16 September, 18:35

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.

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  1. 16 September, 22:25
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    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
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