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%.

Compute Dow's earnings per share for the year ended 31, 2021.

Dow's earnings per share for the year ended 31, 2021 is 335 cents

Explanation:

Earnings Per Share = Profit Attributable to Shareholders of Common Stock/Weighted Average Number of Common stocks

Profit Attributable to Shareholders of Common Stock :

Net income for the year                                                   $2,100,000

Less Dividends to preferred shareholders                        ($75,000)

Profit Attributable to Shareholders of Common Stock   $2025,000

Weighted Average Number of Common stocks :

Shares of Common Stock at the Beginning of the Year   600,000

Add Common Shares Shares Sold (6,000 × 10/12)                5,000

Less Shares Retired ( 2,000 × 6/12)                                        (1,000)

Weighted Average Number of Common stocks                604,000

Earnings Per Share = $2025,000/604,000

                                =  $ 3.35

                                =  335 cents

EPS  = (Net Income- Preference dividends ) / Common Dividends

        = ($2,100,000-$75,000)/ (600,000 + 60,000 - 2,000)

       = $2,025,000/658,000

       = $3.08

Explanation:

The Net income for the year is already after all expense including taxes.

The shares sold means they were issued out to public and raised capital through the sale. Retired shares are first bought back the retired hence the minus 2000 shares.

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