Question

On December 31, 2017, Dow Steel Corporation had 680,000 shares of common stock and 38,000 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 $480,000 and $77,000 to common and preferred shareholders, respectively, on December 15, 2018.

On February 28, 2018, Dow sold 54,000 common shares. Also, as a part of a 2017 agreement for the acquisition of Merrill Cable Company, another 20,000 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 $580,000. In 2018, Merrill's net income was $710,000.

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, 2018, was $2,500,000. 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	Options Granted (adjusted for the stock dividend)	Share Price
Dec 31, 2016	15,000	$16
Dec 31, 2017	10,000	$25
Dec 31, 2018	13,500	$24

The market price of the common stock averaged $24 per share during 2018.

On July 12, 2016, Dow issued $600,000 of convertible 10% bonds at face value. Each $1,000 bond is convertible into 35 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.)

	Nemerator	/	Denominator	=	Earnings per share
Dows Basic		/		=
Dows Dilluted		/		=

Answer 1

	Numerator	/	Denominator	=	Earnings per share
Dows Basic	2423	/	752	=	3.22
Dows Dilluted	2459	/	798	=	3.08

Workings:

1.

Period of holding	Shares	No of shares
1/ 1 - 31/12	680 *12/12* 1.04	707.2
28/2 - 31/12	54 *10/12 *1.04	46.8
1/7- 31/12	4*6/12	-2
Weighted average shares		752

Net Income = Net Income - Preference dividend = 2500 - 77 = 2423

2.

Period of holding	Shares	No of shares
1/ 1 - 31/12	680 *12/12* 1.04	707.2
28/2 - 31/12	54 *10/12 *1.04	46.8
1/7- 31/12	4*6/12	-2
Shares in lieu of profits		20
Convertible bonds	[600 bonds*35]	21
Stock options	[15-10]	5
Potential shares		798

Potential income = 2500 - 77 + after tax Interest on bonds = 2500 -77 + (60 *60%) = 2459