Question

(EPS: Simple Capital Structure) A portion of the combined statement of income and retained earnings of Seminole Inc. for the current year follows.

Income from continuing operations \(15,000,000

Loss from discontinued operations, net of

applicable income tax (Note 1) 1,340,000

Net income 13,660,000

Retained earnings at the beginning of the year 83,250,000

96,910,000

Dividends declared:

On preferred stock—\)6.00 per share \( 300,000

On common stock—\)1.75 per share 14,875,000 15,175,000

Retained earnings at the end of the year \(81,735,000

Note 1. During the year, Seminole Inc. suffered a major loss from discontinued operations of \)1,340,000 after applicable income tax reduction of \(1,200,000.

At the end of the current year, Seminole Inc. has outstanding 8,500,000 shares of \)10 par common stock and 50,000 shares of 6% preferred. On April 1 of the current year, Seminole Inc. issued 1,000,000 shares of common stock for $32 per share to help finance the loss from discontinued operations.

Instructions

Compute the earnings per share on common stock for the current year as it should be reported to stockholders

Short answer

The earnings per share on common stock for the current year to be reported to stockholders is $1.62

Step-by-step solution

Computation of net income available for shareholders-

Income from continuous operations	$15,000,000
Less: Preferred dividend	($300,000)
Common stock Income from continuous operations	$14,700,000
Less: Loss from discontinued operations, net of applicable income tax	($1,340,000)
Net Income	$13,360,000

Computation of weighted average no of shares outstanding-

Date	Shares outstanding	Fraction	Weighted shares
Jan 1	7,500,000	3/12	$1,875,000
Apr 1	8,500,000	9/12	$6,375,000
			$8,250,000

Computation of earnings per share-

Income before extraordinary loss ($14,700,000 / $8,250,000)	1.78
Less: Extraordinary loss ($1,340,000/$8,250,000)	(0.16)
Net Income (10,520,000/5,250,000)	1.62