Question 1 - EPS; convertible preferred stock; convertible bonds; order of entry
Information from the financial statements of Henderson-Niles Industries included the following at December 31, 2013:
Common shares outstanding throughout the year 100 million
Convertible preferred shares (convertible into 32 million shares of common) 60 million
Convertible 10% bonds (convertible into 13.5 million shares of common) $ 900 million
Henderson-Niles' net income for the year ended December 31, 2013, is $520 million. The income tax rate is 40%. Henderson-Niles paid dividends of $2 per share on its preferred stock during 2013.
Required: Compute basic and diluted earnings per share for the year ended December 31, 2013.
Question 2 - EPS; nonconvertible preferred stock; treasury shares; shares sold; stock dividend; options
On December 31, 2012, 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, 2013.
On February 28, 2013, 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, 2013, was $2,100,000. 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, 2011 8,000 $ 24
December 31, 2012 3,000 $ 33
December 31, 2013 6,500 $ 31
The market price of the common stock averaged $32 per share during 2013.
Required: Compute Dow's earnings per share for the year ended December 31, 2013.