Question

16-18 (L04) (EPS: Simple Capital Structure) Flagstad Inc. presented the following data.

Net income \(2,500,000

Preferred stock: 50,000 shares outstanding,

\)100 par, 8% cumulative, not convertible 5,000,000

Common stock: Shares outstanding 1/1 750,000

Issued for cash, 5/1 300,000

Acquired treasury stock for cash, 8/1 150,000

2-for-1 stock split, 10/1

Instructions

Compute earnings per share.

Short answer

Earnings per share of Flagstad inc. is $1.18

Step-by-step solution

Computation of weighted average shares outstanding

EVENT	DATE OUTSTANDING	SHARES OUTSTANDING	RESTATEMENT	FRACTION OF YEAR	WEIGHTED SHARES
Beginning balance	Jan 1- May 1	750,000	2	4/12	500,000
Issued shares	May 1- Aug 1	1,050,000 (750,000+300,000)	2	3/12	525,000
Reacquired shares	Aug 1- Dec 31	900,000 (1,050,000-150,000)	2	5/12	750,000
Weighted average number of shares					1,775,000

Net Income	$2,500,000
Preferred dividend (5,000*100*8%)	-$400,000
Net income less preferred dividend	$2,100,000

Computation of earnings per share

$\begin{array}{rcl}\mathbf{Earnings}\mathbf{}\mathbf{per}\mathbf{}\mathbf{share}& \mathbf{=}& \frac{\mathbf{Netincome}\mathbf{}\mathbf{applicable}\mathbf{}\mathbf{to}\mathbf{}\mathbf{common}\mathbf{}\mathbf{stock}}{\mathbf{Weighted}\mathbf{}\mathbf{average}\mathbf{}\mathbf{number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{shares}\mathbf{}\mathbf{outstanding}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{100}\mathbf{,}\mathbf{000}}{\mathbf{1}\mathbf{,}\mathbf{775}\mathbf{,}\mathbf{000}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{18}\\ & & \end{array}$