On December 31, 2015, Dow Steel Corporation had 620,000 shares of common stock a

Question

On December 31, 2015, Dow Steel Corporation had 620,000 shares of common stock and 32,000 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 $420,000 and $71,000 to common and preferred shareholders, respectively, on December 15, 2016. On February 28, 2016, Dow sold 64,000 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 2016, was $2,200,000. 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 Options Granted (adjusted for the stock dividend) Date Granted Share Price December 31, 2014 December 31, 2015 December 31, 2016 9,000 4,000 7,500 $25 $24 The market price of the common stock averaged $24 per share during 2016 Required: Compute Dow's 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

Explanation / Answer

Dow Steel Corporation Numerator (Basic EPS) : Net income = $2,200,000; Preferred dividends = $71,000 (because the preferred stock is noncumulative, only include the dividends that are actually paid). Denominator (Basic EPS) : Weighted average # shares of common stock outstanding 1/1 - 12/31 620000 x 12 /12 = 620000 x 1.05 = 651000 2/28 - 12/31 64000 x 10 /12 = 53333.33 x 1.05 = 56000 7/1 - 12 /31 (4000) x6/12 = -2000 Weighted average # shares 705000 Basic EPS = ($2,200,000 - $71,000) ÷ 705,000 = $3.12 Stock Options: Use the Treasury Stock Method if dilutive. 9,000 options issued 12/31/14 with exercise price of $16. 1. Are they dilutive? Yes because the exercise price of $16

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