The Heath Corporation reported net income for 2015 of $177,500. Heath began the year with 100,000 shares of $5 par value common shares outstanding and 2,500 shares of $100 par value 8% preferred shares outstanding. On October 1, Heath sold 10,000 shares of common stock for $6 per share. Heath paid dividends to the common shareholders in December.
-The basic earnings per share for 2015 is (rounded)

Question

Quizplus · Accepted Answer

To calculate basic earnings per share, we need to divide the net income available to common shareholders by the weighted average number of common shares outstanding during the period.

Net income available to common shareholders = Net income - Preferred dividends
Preferred dividends = Preferred shares outstanding * Par value * Annual dividend rate = 2,500 * $100 * 8% = $20,000
Net income available to common shareholders = $177,500 - $20,000 = $157,500

Weighted average number of common shares outstanding = 
100,000 shares * 9/12 (since 3 months have passed before the stock issuance) + 
110,000 shares * 3/12 (since 3 months have passed after the stock issuance) = 
(75,000 + 27,500) shares = 102,500 shares

Basic earnings per share = Net income available to common shareholders / Weighted average number of common shares outstanding = $157,500 / 102,500 shares = $3.94 per share.

The Heath Corporation Reported Net Income for 2015 of $177,500