Question

On December 31, 2020, Dow Steel Corporation had 800,000 shares of common stock and 320,000 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 $600,000 and $89,000 to common and preferred shareholders, respectively, on December 15, 2021.

On February 28, 2021, Dow sold 75,000 common shares. In keeping with its long-term share repurchase plan, 4,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2021, was $3,100,000. The income tax rate is 25%.

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		27,000		$	46
December 31, 2020		22,000		$	55
December 31, 2021		25,500		$	54

The market price of the common stock averaged $54 per share during 2021.

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

Answer 1

Basic EPS:-

Net income = $3,100,000;

Preferred dividends = $89,000 (as the well-liked stock is non-cumulative, solely embrace the dividends that are literally paid).

Therefore, dividend = Earnings thanks to Common Stockholders = $3,100,000 - $89,000 = $3,011,000

Denominator = Weighted average range of shares of ordinary shares outstanding

= (800,000*12/12*1.04) + (75,000*10/12*1.04) - (4,000*6/12) = 895,000 shares.

Basic EPS = $3,011,000/895,000 = 3.36

Diluted EPS:-

Firstly, we've got to see that of the choices granted ar dilutive. given that the exercise worth is a smaller amount than the value, the choices ar aforementioned to be dilutive. Therefore, only 27,000 choices granted on December thirty first, 2019 ar dilutive that ar granted at AN execise worth of $46.

Proceeds if such grant is exercised = $46 x twenty seven,000 = $1,242,000

Number of shares which will be bought at current value with the on top of yield = $1,242,000/$54 = twenty three,000

Net increase in shares = twenty seven,000 - 23,000 = 4,000

Diluted EPS = $3,011,000 / (895,000 + 4,000) = $3.35

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