On December 31, 2012, Dow Steel Corporation had 700,000 shares of common stock a
ID: 2477466 • Letter: O
Question
On December 31, 2012, Dow Steel Corporation had 700,000 shares of common stock and 40,000 shares of 10%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 5% common stock dividend on May 15 and paid cash dividends of $500,000 and $79,000 to common and preferred shareholders, respectively, on December 15, 2013. On February 28, 2013, Dow sold 64,000 common shares. In keeping with its long-term share repurchase plan, 6,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2013, was $2,600,000. 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 = 12/31/2011 Options granted (adjusted for the stock dividend) = 17,000 share price = $26 Date granted = 12/31/2012 Options granted (adjusted for the stock dividend) = 12,000 share price = $35 Date granted = 12/31/2013 Options granted (adjusted for the stock dividend) = 15,500 share price = $34 The market price of the common stock averaged $34 per share during 2013. Required: Compute Dow's earnings per share (basic and diluted) for the year ended December 31, 2013. (Do not round intermediate calculations and round your final answers to 2 decimal places.)
Explanation / Answer
date Issues/Retired No.of Outstanding Shares After Stock dividend. of shares outsnading No.of Months held Weighted average shares 1-Jan 700000 735000 2/12 months 122500 28-Feb 64000 764000 802200 4/12 months 267400 1-Jul -6000 758000 795900 6/12 month 397950 Total 787850 Note stock dividend has effect from the start of the year Ans a Basic EPS=Net Income-Preferred Dividend/Weighted averga no.of common stockholder 2600000-79000/787850 3.199848 3.20 Ans Now for Diluted EPS we have to take dilutive portion of options. Note the options can be exerside after 1 year of grant of option so options Options for 2011 Multiply the exercise price with no. ofoptions 17000*26 442000 Divide the proceeds by market price 442000/34 13000 No. of Dilutive Shares 17000-13000 4000 Options for 2012 Multiply the exercise price with no. ofoptions 12000*35 420000 Divide the proceeds by market price 420000/34 12353 shares There are no dilutiove shares in this case 12000 is less than 12353 To be dilutives the exercise price must be less than market price which is just the case of 2011 Ans b Dilutive EPS (2600000-79000)/(787850+4000) 3.1837 3.18 Ans
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