Reference no: EM131562304

Problem - On December 31, 2015 Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares of 8% noncumulative, nonconvertible preferred stock issues 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, 2016.

On February 28, 2016 Dow sold 60,000 common shares. In keeping with its long-term share repurchase plan, 2,000 shares were retired on Jul 1. Dow's net income for the year ended December 31, 2016, was $2,100,000. The income tax rate was 40%. Also, as a part of a 2015 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, 2017, if Merrill's 2017 net income is at least $500,000. In 2016, Merrill's net income was $630,000.

As part of an incentive compensations 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, 2014	8,000	$24
December 31, 2015	3,000	$33
December 31, 2016	6,500	$32

The market price of the common stock averaged $32 per share during 2016.

On July 12, 2014, Dow issued $800,000 of convertible 10% bonds 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, 2016.