Reference no: EM132752698

Question - EPS; nonconvertible preferred stock; treasury shares; shares sold; stock dividend; options; convertible bonds; contingently issuable shares

On December 31, 2020, Dow Steel Corporation had 710,000 shares of common stock and 311,000 shares of 7%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 4% common stock dividend on May 15 and paid cash dividends of $510,000 and $80,000 to common and preferred shareholders, respectively, on December 15, 2021.

On February 28, 2021, Dow sold 63,000 common shares. In keeping with its long-term share repurchase plan, 4,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2021, was $2,650,000. The income tax rate is 25%. Also, as a part of a 2020 agreement for the acquisition of Merrill Cable Company, another 35,000 shares (already adjusted for the stock dividend) are to be issued to former Merrill shareholders on December 31, 2022, if Merrill's 2022 net income is at least $610,000. In 2021, Merrill's net income was $740,000.

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:

Options Granted Date Granted(adjusted for the stock dividend)Share Price

December 31, 2019 18,000 $28

December 31, 2020 13,000 $37

December 31, 2021 16,500 $36

The market price of the common stock averaged $36 per share during 2021.

On July 12, 2019, Dow issued $900,000 of convertible 8% bonds at face value. Each $1,000 bond is convertible into 40 common shares (adjusted for the stock dividend).

Required - Compute Dow's basic and diluted earnings per share for the year ended December 31, 2021.