Question

1. Keira’s Kitchen Company presented the following data: Net Income $2,500,000 Preferred Stock, 50,000 shares outstanding, $100 par, 8% Cumulative, Not Convertible $5,000,000 Common Stock 1/1 $1 par 750,000 Shares Outstanding Common Stock 5/1 $1 par 300,000 additional Shares Treasury Stock Acquired Aug 1 150,000 Shares Purchased 2-for-1 stock split Oct 1 REQUIRED: Compute Earnings Per Share-EPS

Answer 1

Answer:

Earnings Per Share (EPS) = $1.18

Explanation:

We know,

Earnings Per Share (EPS) = $\frac{Net Income - Preferred Dividend}{No. of shares outstanding}$

Here,

Net Income = $2,500,000

Preferred Dividend = Total preferred stock in dollar x cost of preferred stock

Preferred Dividend = $5,000,000 x 8% = $400,000

No. of shares outstanding table is shown below (Weighted):

Shares outstanding + Additional shares - Treasury stock =

[750,000 x stock split] + [300,000 x (8/12) x stock split] - [150,000 x (5/12) x stock split]

= (750,000 x 2) + (200,000 x 2) - (62,500 x 2)

= 1,500,000 + 400,000 - 125,000

= 1,775,000

Now, EPS = $\frac{2,500,000 - 400,000}{1,775,000}$

EPS = 1.18 (rounded to 2 decimal places)

Note: 1. As, there is a stock split of 2-for-1, that's why we multiply the stock by 2.

2. Since additional shares are issued on 1st May, therefore, the weight from May to December is for 8 months. Repurchased or Treasury stock should be removed from number of shares.