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On December 31, 2020, Dow Steel Corporation had 720,000 shares of common stock and 312,000 shares...

On December 31, 2020, Dow Steel Corporation had 720,000 shares of common stock and 312,000 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 $520,000 and $81,000 to common and preferred shareholders, respectively, on December 15, 2021.

On February 28, 2021, Dow sold 66,000 common shares. In keeping with its long-term share repurchase plan, 8,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2021, was $2,700,000. The income tax rate is 25%. Also, as a part of a 2020 agreement for the acquisition of Merrill Cable Company, another 19,000 shares (already adjusted for the stock dividend) are to be issued to former Merrill shareholders on December 31, 2022, if Merrill's 2022 net income is at least $620,000. In 2021, Merrill's net income was $750,000.

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:

	Options Granted
Date Granted	(adjusted for the stock dividend)		Share Price
December 31, 2019		19,000	$	30
December 31, 2020		14,000	$	39
December 31, 2021		17,500	$	38

The market price of the common stock averaged $38 per share during 2021.

On July 12, 2019, Dow issued $1,000,000 of convertible 8% bonds at face value. Each $1,000 bond is convertible into 20 common shares (adjusted for the stock dividend).

Required:
Compute Dow's basic and diluted earnings per share for the year ended December 31, 2021. (Enter your answers in thousands. Round "Earnings per share" answers to 2 decimal places. Do not round intermediate calculations)

Expert Solution

Computation of earnings per share is:

Earnings per share = (Net income - Preferred dividend) / Number of weighted shares

=($2,700,000 - $81,000)/ 802,000

= $2,619,000 / 802,000

= 3.26

Hence, the earning per share is 3.26

Working Notes:

1.

Computation of common shares on January 1 to December 31 is:

Common shares on January 1 to December 31 = Common shares * (1 + Percentage of common dividend) * (Number of months from January 1 to December 31 / Total Number of months in a year)

= 720,000 * (1 + 0.04) * (12/12)

=720,000 * 1.04 * 1

= 748,800

Hence, the common shares on January 1 to December 31 is 748,800.

2.

Computation of common shares on February 28 to December 31 is:

Common shares on February 28 to December 31 = Common shares * (1 + Percentage of common dividend) * (Number of months from February 28 to December 31 / Total Number of months in a year)

= 66,000 * (1 + 0.04) * (10/12)

= 66,000 * 1.04 * (10/12)

= 57,200

Hence, the common shares on February 28 to December 31 is 57,200.

3.

Computation of number of repurchased shares on July 1 to December 31 is:

Number of repurchased shares on July 1 to December 31 = Number of repurchased shares * (Number of months from July 1 to December 31 / Total Number of months in a year)

= 8,000 * (6/12)

= 4,000

Hence, the number of repurchased shares on July 1 to December 31 is 4,000.

4.

Computation of number of weighted shares is:

Number of weighted shares = Common shares on January 1 to December 31 + Common shares on February 28 to December 31 - Number of repurchased shares on July 1 to December 31

= 748,800 + 57,200 - 4,000

= 802,000

Hence, the number of weighted shares is 802,000.

ekkarill92 answered 1 year ago

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