Question

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. Also, as a part of a 2017 agreement for the acquisition of Merrill Cable Company, another 23,000 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 $500,000. In 2018, Merrill's net income was $630,000. 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 Share Price December 31, 2016 December 31, 2017 December 31, 2018 Options Granted (adjusted for the stock dividend) 8,000 3,000 6,500 $ 24 $ 33 $ 32 The market price of the common stock averaged $32 per share during 2018. On July 12, 2016, Dow issued $800,000 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.) Numerator 7 Denominator = Earnings per share Dow's basic Dow's diluted

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Answer 1

SOL compute the Dows basic and disuted eanings Pes 3 2018 Shorbe fo6 the yeao ended Decembe TOtOl no. ommon Stock NO O Shases held No e Shooed held XstoU dividend Rescen tag Hese Numbes d Shases heid= G00-000 Stock dividend pescentoge 4% GO0 000 +600.000 X4% ) Totes no.a common Stok GOD000 t(G00 000 x400 e oo0.000 tlGoo 000 X04 2$600. O00 +40.000 $840.000 Totel no. ch Common stock = $840.000 weishted avesage no.cb Shased Sold (NOO Oed Sold Xtime Pesiod) x stock dividend G00.000X 12 04 50.000 x 1.04

$.52.00O weighted avesage no c Sharses Sold $52-000 weighted avesoge d Sorses setiseoNO.C Sha'ses etised x time Peoioc $2000x G/12 $ 18000 lo00 shoges. A mount Parsticulorss Total no common stock $ 690.000 weighted ovesage no ab Shaes $2.000 Sold weighted avesage co Shorses setrsed $1000 Shorses Statement Porsticularss Amount (NO Shats) TO-a no. cb common Sharses $624.000 Add weighted avesage no.cb Shaées 52.000 Sold Less weighted ovesage do sharses Tetised $1000 Total weishtea aves0ge no o $624 000+$52.006 $1000 P $675.DD O Sharses

Total werahted avesage no.cb shases = Total no.d common shaves tAdd: ueighted overc weighted avesage o ae no.ah Shotbes sold Shorses setrsed Total weighted aves0ge no co Shorses 624 .000+52.000 -l0o0 - $676000 -L000 P$695.000. Total weigated avesage no c6 Shac6es- $695-0OO, Cosnings pes sharse NT-PDjwAS $2.100.000 15.D00 675.000 Shases $ 3.026.000 $676.000 $3 pe Shabe eosnings pes shose $3 Peo shose whese N2 Net inceme PD PrefeVEd dividend s.

waghted avesoge no c Common Shanes W-AS eut standing peo sharse- $3 pers Shaoe tasnings