Question

On December 31, 2020, 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, 2021. On February 28, 2021, Dow sold 60,000 common shares. 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, 2021, was $2,100,000. The income tax rate is 25%. 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
Date Granted (adjusted for the stock dividend) Share Price
December 31, 2019 15,000 $ 16
December 31, 2020 10,000 $ 25
December 31, 2021 13,500 $ 24

The market price of the common stock averaged $24 per share during 2021.

Required:
Compute Dow's earnings per share for the year ended December 31, 2021. (Do not round intermediate calculations. Enter your answers in thousands. Round "Earnings per share" answers to 2 decimal places.)

Answer 1

Earnings per share (EPS) is $3.00

Explanation:

Net income = $2,100,000

Preferred dividends = $75,000 (as the preferred stock is non cumulative, only include the dividends that are actually paid).

Numerator EPS = $2,100,000 minus $75,000

= $ 2,025,000

Denominator EPS = Weighted average of shares of common stockoutstanding.

1/1 - 12/31 -----600,000 into (12 by 12) = 600,000 into 1.04 = 624,000

2/28 - 12/31 -----60,000 into (10 by 12) = 50,000  into 1.04 = 52,000

7/1 - 12/31 ------(2,000) into (6 by 12) = (1,000)

Weighted average shares =   675,000

EPS = $2,025,000 by 675,000 = $3.00

Earnings per share (EPS) = $3.00