Question

P 9-9Assume the following facts for the current year: Net income$200,000Common dividends$ 20,000Preferred dividends (The preferred...

P 9-9Assume the following facts for the current year: Net income$200,000Common dividends$ 20,000Preferred dividends (The preferred stock is not convertible.)$ 10,000Common shares outstanding on January 120,000 shares common stock issued on July 15,000 shares2-for-1 stock split on December 31

Required.

a. Compute the earnings per share for the current year

.b. Earnings per share in the prior year was $8.00. Use the earnings per share computed in(a) and present a two-year earnings per share comparison for the current year and the prior year.

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Homework Answers

Answer #1

Solution:-

a) Computation of EPS for Current Year:- EPS = (Net Income - Preferred Dividend ) / Avg O/s Common Shares

= (200000-10000)/ 270000 = EPS is 0.70.

(Calculation of Avg O/s Common Shares at the end of Current Year = Total shares before stock split are (120000+1500) = 135000. After Stock Split i.e 2 :1 ratio 135000*2 = 270000 Shares )

b) Comparison for Current & Prior Year EPS: -

Sr No

 Particulars Current Year *Previous Year
1 Net Income 200000 970000
2 Preferred Dividend 10000 10000
3 Net Income Distributable to Common Stock Holders 190000 960000
4 O/s Shares at the end of year 270000 120000
5 EPS = (3/4) 0.70 8

*Calculation of Previous Year Net Income (Given EPS i.e 8 & O/s Shares is 120000)

Substituting the above values in the EPS formulae we get =120000*8 =960000.

   Add : Preferred Dividend = 10000

Net Income = 970000.

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