Question

On December 31, 2015, 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, 2016 sold 60,000 common shares. Also, as a part of a 2015 agreement for the On February 28, 2016, Dow acquisition of Merrill Cable Company, another 24,000 shares (already adjusted for the stock dividend) are to be issued to former Meril shareholders on December 31, 2017, if Merrili's 2017 net income is at least $630,000. In 2016, Merrill's net income was $760,000. income for the year ended December 31, 2016, was $2,750,000 The income tax rate is 40% December 31 of the current and each of the previous two years. Each option permits its holder In keeping with its long-term share repurchase plan, 2,000 shares were retired on July 1. Dow's net ntive compensation plan, Dow granted incentive stock options to division managers at an exercise price equal to market value at the date of grant and can be exercised As part of an ince to buy one year from that date. Information concerning the number of options granted and common share prices follows: Options GrantedShare Price Date Granted (adjusted for the stock dividend) 20,000 15,000 18,500 $32 $41 $40 December 31, 2014 December 31, 2015 December 31, 2016 The market price of the common stock averaged $40 per share during 2016. % bonds at face value. Each $1,000 bond is On July 12, 2014, Dow issued $500.000 of convertible 10 convertible into 50 common shares (adjusted for the stock dividend) Required: Compute Dow's basic and diluted earnings per share for the year ended December 31, 2016. (Enter your answers in thousands.) Numerator Denominator Earnings per share Dow's basic Dow's diluted

Answer 1

Numerator ( Basic EPS) : net income =$2,750,000 , Preferred dividends =$82,000 (because preferred stock is non cumulative it only include the dividends which are already paid).

Denominator (Basic EPS) : Weightex average #shares of common stock outstanding.

1/1 - 12/31 730,000×(12/12) = 730,000 × 1.05 = 766,500

2/28 - 12/31 60,000×(10/12) × 1.05 = 52,500

7/1 - 12/31 (2,000)× (6/12) = (1,000)

Weighted average#shares = 766,500+52,500-1,000 = 818,000

Basic EPS = ($2,750,000 - $82,000)÷818,000 =$3.26

Stock options Use treasury stock method if dilutive.

20,000 options issued 31/12/14 with exercise price of $32.

1. They are dilutive because the exercise price of $32<market price of $40. Assume exercise at the later of the date of issue 31/12/14 or the beginning of the year.

2. Proceeds received upon exercise ($32×20,000)= $640,000

3. Shares repurchased at current market price =($640,000÷$40)=$16,000

4. Net increase in # shares = (20,000-16,000)= 4,000

15,000 options issued 12/31/15 with exercise price of $41.

They are not dilutive because the exercise price $41 is not less than the market price of $40. Therefore, ignore.

18,500 options issued 12/31/16 with exercise price of $40.

They are not dilutive because the exercise price of $40 is not less than the market price of $40. Therefore, ignore.

Basic EPS =($2,750,000 - $82,000)÷818,000 =$3.26

Diluted EPS = ($2,750,000 - $82,000) ÷(818,000+4,000)= $3.24