# Calculating Basic and Diluted EPS

September 29, 2018

Problem 19-11 EPS; nonconvertible preferred
stock; treasury shares; shares sold; stock dividend; options; convertible
bonds; contingently issuable shares LO4 through LO10

On December 31, 2008, 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, 2009.

On February 28, 2009, Dow sold 60,000 common shares. Also, as a
part of a 2008 agreement for the acquisition of Merrill Cable Company,
another 23,000 shares (already adjusted for the stock dividend) are to be
issued to former Merrill shareholders on December 31, 2010, if Merrill’s 2010
net income is at least \$500,000. In 2009, Merrill’s net income was \$630,000.

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, 2009, was \$2,100,000. The income tax rate is 40%.

As part of an incentive compensation plan, Dow granted 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

stock dividend)

December 31, 2007

8,000

\$24

December 31, 2008

3,000

\$33

December 31, 2009

6,500

\$31

The market price of the common stock averaged \$32 per share
during 2009.

On July 12, 2007, Dow issued \$800,000 of convertible 10%
debentures at face value. Each \$1,000 bond is convertible into 30 common
shares (adjusted for the stock dividend).

Required:

Compute Dow’s basic and diluted earnings per share for the year
ended December 31, 2009.

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