Question:
On December 31, 2012, Dow Steel Corporation had 730,000 shares of common stock and 43,000 shares of 9%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 5% common stock dividend on May 15 and paid cash dividends of $82,000 and $530,000 to common and preferred shareholders, respectively, on December 15, 2013.
On February 28, 2013, Dow sold 60,000 common shares. Also, as a part of a 2012 agreement for the acquisition of Merrill Cable Company, another 24,000 shares are to be issued to former Merrill shareholders on December 31, 2014, if Merrill's 2014 total income is at least $630,000. In 2013, Merrill's net income was $760,000.
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, 2013, was $2,750,000. 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 last 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 will 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 20,000 $ 32
December 31, 2012 15,000 $ 41
December 31, 2013 18,500 $ 40
The market price of the common stock averaged $40 per share during 2013.
On July 12, 2011, Dow issued $500,000 of convertible 10% bonds at face value. Each $1,000 bond is convertible into 50 common shares (adjusted for the stock dividend).
Required:
Compute Dow's diluted and basic earnings per share for the year ended December 31, 2013.