Question

# On December 31, 2015, Dow Steel Corporation had 650,000 shares of common stock and 35,000 shares...

 On December 31, 2015, Dow Steel Corporation had 650,000 shares of common stock and 35,000 shares of 9%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 5% common stock dividend on May 15 and paid cash dividends of \$450,000 and \$74,000 to common and preferred shareholders, respectively, on December 15, 2016. On February 28, 2016, Dow sold 64,000 common shares. Also, as a part of a 2015 agreement for the acquisition of Merrill Cable Company, another 26,000 shares (already adjusted for the stock dividend) are to be issued to former Merrill shareholders on December 31, 2017, if Merrill's 2017 net income is at least \$550,000. In 2016, Merrill's net income was \$680,000. In keeping with its long-term share repurchase plan, 7,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2016, was \$2,350,000. 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 Share Price (adjusted for the stock dividend) December 31, 2014 12,000 \$ 16 December 31, 2015 7,000 \$ 25 December 31, 2016 10,500 \$ 24
 The market price of the common stock averaged \$24 per share during 2016. On July 12, 2014, Dow issued \$900,000 of convertible 10% bonds at face value. Each \$1,000 bond is convertible into 30 common shares (adjusted for the stock dividend).

Compute Dow's basic and diluted earnings per share for the year ended December 31, 2016

Basic EPS for Common Stock= \$ 4,50,000/ 3,50,000 = \$ 1.2857

Basic EPS for 9% Preferred stock= \$ 74,000/ 35000 = \$ 2.1143

Weighted average number of common stock= 650000*2/12 months+612000*4/12months+605000*6/12 months=108333+204000+302500=614833 shares

Profit Available to Common stock holders= \$ 23,50,000*60% - \$ 74,000(Pref.Dividend)+ \$ 90000*60%(savings in dividend)

=\$ 14,10,000-\$ 74000+\$54000

=\$ 1390000

Therefore Dilluted EPS = Profit Available to Common stock holders/No of out standing Shares

= \$ 1390000/614833

=\$ 2.26

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