Question

Problem 19-11 EPS; nonconvertible preferred stock; treasury shares; shares sold; stock dividend [LO19-4, 19-5, 19-6, 19-7]

On December 31, 2017, Dow Steel Corporation had 780,000 shares of common stock and 48,000 shares of 10%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 5% common stock dividend on May 15 and paid cash dividends of $580,000 and $87,000 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, 5,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2018, was $3,000,000. The income tax rate is 40%.
  
Required:
Compute Dow's earnings per share for the year ended December 31, 2018. (Do not round intermediate calculations. Enter your answers in thousands.)

Answer 1

Solution:

Earnings per share = earnings available for common stock / weighted avg no of shares outstanding

Earnings available for common stock = net income - preferred dividends

                                                                     = $3,000,000 - $87,000

                                                                     = $ 2,913,000

Weighted avg no of shares outstanding = Beginning shares (after stock dividend adjustment)+ new shares sold (after stock dividend adjustment )- shares retired

=( 780,000 shares*1.05*12/12)+( 68,000 shares*10/12*1.05)-( 5,000 shares *6/12)

= 819,000 shares + 59,500 shares - 2,500 shares =876,000 shares

Earnings per shares = $ 2,913,000 /876,000 shares = $3.32 per share

Therefore Dow's earnings per share for the year ending December 31,2018 is $3.32 per share