Question

On December 31, 2017, Dow Steel Corporation had 650,000 shares of common stock and 35,000 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 $450,000 and $74,000 to common and preferred shareholders, respectively, on December 15, 2018.

On February 28, 2018, Dow sold 64,000 common shares. Also, as a part of a 2017 agreement for the acquisition of Merrill Cable Company, another 26,000 shares (already adjusted for the stock dividend) are to be issued to former Merrill shareholders on December 31, 2019, if Merrill's 2019 net income is at least $550,000. In 2018, Merrill's net income was $680,000.

In keeping with its long-term share repurchase plan, 7,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2018, was $2,350,000. 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:

Problem 19-13 EPS; nonconvertible preferred stock; treasury shares; shares sold; stock dividend; options, convertible bonds; contingently issuable shares [LO19-4, 19-5, 19-6, 19-7, 19-8, 19-9, 19-10, 19-11) On December 31, 2017, Dow Steel Corporation had 650,000 shares of common stock and 35,000 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 $450,000 and $74,000 to common and preferred shareholders, respectively. on December 15, 2018 On February 28, 2018, Dow sold 64,000 common shares. Also, as a part of a 2017 agreement for the acquisition of Merrill Cable Company, another 26,000 shares (already adjusted for the stock dividend) are to be issued to former Merrill shareholders on December 31, 2019, if Merrill's 2019 net income is at least $550,000. In 2018, Merrill's net income was $680,000. In keeping with its long-term share repurchase plan, 7,000 shares were retired on July 1. Dow's net come for the year ended December 31, 2018, was $2,350,000. 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 Share Price December 31, 2016 December 31, 2017 December 31, 2018 Options Granted (adjusted for the stock dividend) 12,000 7,000 10,500 $ 16 $ 25 S 24 The market price of the common stock averaged $24 per share during 2018, On July 12, 2016, Dow issued $900,000 of convertible 10% bonds at face value. Each $1,000 bond is convertible into 30 common shares (adjusted for the stock dividend). Required: Compute Dow's basic and diluted earnings per share for the year ended December 31, 2018. (Enter your answers in thousands.)

Answer 1

	Numerator	/	Denominator	=	Earnings per share
Dow’s Diluted	2330	/	792	=	$2.94

Numerator = net income – preferred dividends + after-tax interest savings = 2350-74+(90*(1-40%)) = $2330

Denominator = weighted average number of shares =shares at Jan. 1 + new shares – shares retired + exercise of options + contingent shares + conversion of bonds = (650*12/12*1.05)+(64*10/12*1.05)-(7*6/12)+4+26+27 = 792

Shares	12000
Exercise price	16
	$192000
average market price	$24
Shares	8000
Exercise of options (12000-8000)	4000 shares

contingent shares

conversion of bonds = 900000/1000*30 = 27000

Diluted EPS = 2330/792 = $2.94