Chapter 19, Problem 19.12P

EPS; non convertible preferred stock; treasury shares; shares sold; stock dividend; options

• LO19–4 through LO19–8, LO19–10

(Note: This is a variation of P 19–11, modified to include stock options.)

On December 31, 2017, 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, 2018.

On February 28, 2018, 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, 2018, 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, 2016	8,000	$24
December 31, 2017	3,000	$33
December 31, 2018	6,500	$32

The market price of the common stock averaged $32 per share during 2018.

Required:

Compute Dow’s earnings per share for the year ended December 31, 2018.