Question

Problem 19-12 EPS; nonconvertible preferred stock; treasury shares; shares sold; stock dividend; options [LO19-4, 19-5, 19-6, 19-7, 19-8, 19-10]

On December 31, 2017, Dow Steel Corporation had 600,000 shares of common stock and 300,000 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 $400,000 and $75,000 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 $2,100,000. The income tax rate is 40%.

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:

Date Granted	Options Granted			Share Price
	(adjusted for the stock dividend)
December 31, 2016		8,000		$	24
December 31, 2017		3,000		$	33
December 31, 2018		6,500		$	32

The market price of the common stock averaged $32 per share during 2018.

Required:
Compute Dow's earnings per share for the year ended December 31, 2018. (Enter your answers in thousands.)

Answer 1

(A)	CALCULATION OFNET INCOME
DESCRIPTION			AMOUNT($)
INCOME			2100000
LESS-PREFERENCE DEVIDND			75000
NET INCOME			2025000
WEIGHTED AVARAGE NO OF SHARE
DATE	PARTICULARES	WITH CS DIVIDEND	AMOUNT
31-12-2017	600000*12/12=600000	600000*1.04           =	624000
28-02-2018	60000*10/12=50000	50000*1.04             =	52000
01-07-2018	2000*6/12=1000	1000(RETIRED)      =	-1000
	TOTAL NO OF SHARES		675000
	EPS	2025000/675000=$3PER SHARE
(B)DIULETD EPS
SHARES PRICE ON 31 DEC 2016 IS LOW THAN THE AVERAGE MARKET PRICE SO -
THESE ARE DILUTIVE
CALCULATION=                                                                             8000*24=192000
	DIVIDE BY MARKET PRICE 32		192000/32=6000
	DILUTED EPS =	2025000	$2.97 PER SHARE
		67500+6000