Question

On December 31, 2017, Dow Steel Corporation had 730,000 shares of common stock and 43,000 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 $530,000 and $82,000 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 $2,750,000. 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.)

	Numerator / Denominator = Earnings per share / =

Answer 1

Step 1: Calculate Net Income Available to Equity Shareholders

The amount of net income available to equity shareholders is arrived as below:

Net Income Available to Equity Shareholders = Net Income for the Year - Preferred Dividends Paid
                                                                        = $2,750,000 - $82,000
                                                                        = $2,668,000 or 2668 Thousands

____

Step 2: Calculate Weighted Average Number of Common Shares Outstanding

The weighted average number of common shares outstanding is calculated as follows:

	Particulars	Number of Common Shares (A)	No of months Shares Remain Outstanding	Stock dividend	Calculation	Weighted average shares
	Shares outstanding as on Dec 31, 2017	730,000	12	5%	(730,000*12/12)*105%	766,500
	Shares issued on Feb 28, 2018	60,000	10	5%	(60,000*10/12)*105%	52,500
	Less: Shares repurchased (retired on July 1)	2,000	6		-(2000*6/12)	(1,000)
	Weighted average no of shares					818,000 or 818 Thousands

Step 3: Calculate EPS

The value of EPS is determined as below:

Numerator (in thousands)	/	Denominator (in thousands)	=	Earnings Per Share
2,668	/	818	=	$3.26

Answer is $3.26