(Note: This is a variation of P 19–11, modified to include stock options.)
On December 31, 2020, Dow Steel had 600,000 shares of and 300,000 shares of 8%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 4% dividend on May 15 and paid cash dividends of $400,000 and $75,000 to common and preferred shareholders, respectively, on December 15, 2021.
On February 28, 2021, 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, 2021, was $2,100,000. The income tax rate is 25%.
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 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:
The market price of the averaged $32 per share during 2021.
Required:
Compute Dow’s earnings per share for the year ended December 31, 2021.
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