Question :
On December 31, 2012, Dow Steel Corporation had 650,000 shares of common stock and 35,000 shares of 9%, nonconvertible, noncumulative 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 preferred and common shareholders, respectively, on December 15, 2013.
On February 28, 2013, Dow sold 64,000 common shares. Also, as a part of a 2012 agreement for the acquisition of Merrill Cable Company, another 26,000 shares (previously adjusted for the stock dividend) are to be issued to former Merrill shareholders on 31st December, 2014, if Merrill's 2014 total income is at least $550,000. In 2013, Merrill's total income was $680,000.
In keeping with its long-term share repurchase plan, 7,000 shares were retired on July 1. Dow's total income for the year ended December 31, 2013, 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 present and each of the previous two years. Every option permits its holder to purchase one share of common stock at an exercise price identical to market value at the date of grant and will be exercised one year from that date. Information concerning the number of options granted and common share prices given:
Date Granted Options Granted Share Price
(adjusted for the stock dividend)
December 31, 2011 12,000 $ 16
December 31, 2012 7,000 $ 25
December 31, 2013 10,500 $ 24
The market price of the common stock averaged $24 per share during 2013.
On July 12, 2011, 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).