Question

On December 31, 2017, Dow Steel Corporation had 700,000 shares of common stock and 40,000 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 $500,000 and $79,000 to common and preferred shareholders, respectively, on December 15, 2018.

On February 28, 2018, Dow sold 64,000 common shares. In keeping with its long-term share repurchase plan, 6,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2018, was $2,600,000. 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

Solution

Dow Steel Corporation

Computation of Dow’s earnings per share for the year ended December 31, 2018:

Numerator	∕	Denominator	=	Earnings per Share
$2,521,000	∕	7,88,000	=	$3.20

Computations:

Basic Earnings per Share = net income for holders of common stock/weighted average number of common shares

Net income for common shareholders = $2,521,000

Weighted average number of common shares = 788,000

Basic EPS = $2,521,000/788,000 = $3.20

Calculations -

Net income for common shareholders –

Net income = $2,600,000

Preferred dividends = $79,000

(since the preferred stock is non-cumulative, only actual dividends paid are included).

Net income for common shareholders = $2,521,000

Weighted average number of common shares outstanding:

Jan 1 - Dec 31	700,000 x 12/12	=	700,000 x 1.05 = 735,000
Feb 28 - Dec 31	64,000 x 10/12 =		53,333.33 x 1.05 = 56,000
July 1 - Dec 31	(6,000 x 6/12)	=	-3,000
Weighted average number of shares			788,000