Q37E_1 - Horngren'S Financial And Managerial Accounting

Question

Computing earnings per share and price/earnings ratio

Rocket Corp. earned net income of \(153,040 and paid the minimum dividend to preferred stockholders for 2018. Assume that there are no changes in common shares outstanding during 2018. Rocket’s books include the following figures:

Preferred Stock—6%, \)60 par value; 2,000 shares authorized, 1,000 

shares issued and outstanding \( 60,000

Common Stock—\)5 par value; 80,000 shares authorized, 48,000 shares 

issued, 46,700 shares outstanding 240,000

Paid-In Capital in Excess of Par—Common 470,000

Treasury Stock—Common; 1,300 shares at cost (26,000)

Requirements

1. Compute Rocket’s EPS for the year.

Step-by-Step Solution

Answer

Earnings per share of the company is $3.16

Step 1: Basic Introduction-

Net income: $153,040

$\begin{array}{rcl}\mathbf{PreferredDividend}& \mathbf{=}& \mathbf{NumberofShares}\mathbf{\times }\mathbf{ValuePerShare}\mathbf{\times }\mathbf{DividendRate}\\ & \mathbf{=}& \mathbf{1}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{60}\mathbf{\times }\mathbf{6}\mathbf{\%}\\ & \mathbf{=}& \mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{600}\\ & & \end{array}$

$$\begin{gathered} \begin{array}{rcl}\mathbf{WeightedAverageNumberofEquitySharesOutstanding}& \mathbf{=}& \frac{\mathbf{NumberofStocksatBegining}\mathbf{+} \\ \left(\mathbf{NumberofStocksatBegining}\mathbf{-}\mathbf{TreasuryStock}\right) \\ }{\mathbf{2}}\\ & \mathbf{=}& \frac{\mathbf{46}\mathbf{,}\mathbf{700}\mathbf{+}\left(\mathbf{46}\mathbf{,}\mathbf{700}\mathbf{-}\mathbf{1}\mathbf{,}\mathbf{300}\right)}{\mathbf{2}}\\ & \mathbf{=}& \mathbf{46}\mathbf{,}\mathbf{050}\\ & & \end{array} \end{gathered}$$

Step 2: Computation of Earnings Per Share-

Earnings per share
Net income	$153,040
Preferred dividend	($3,600)
a.	$149,440
b. weighted average number of equity share outstanding	$46,050
Earnings per share (a/b)	$3.25