Basic earnings per share is income available to common shareholders divided by the weighted average number of common shares outstanding. Income Available to Common Shareholders (IAC): IAC is net income minus preferred dividends paid for non-cumulative preferred stock (or cumulative preferred dividends earned ). The company has 10,000 outstanding shares of $100 par value, non-cumulative, 6% preferred stock. The total par value of the preferred stock is 10,000 × $100, or $1,000,000. The dividend is payable on the par value, and 6% of $1,000,000 is $60,000. The problem says that Collins declared and paid all preferred dividends during the year. Therefore, IAC = $350,000 ? $60,000, or $290,000. WANCSO: We are told that there were 100,000 shares of common stock outstanding all year. This is the weighted average number of common shares outstanding. Even though the problem tells us that there were 5,000 shares of common stock in treasury during the year, we do not subtract those shares from the 100,000 common shares that we are told were outstanding. Nor do we add them to it. Treasury stock is not outstanding common stock, so it is irrelevant to the calculation of the weighted average number of common shares outstanding. Basic earnings per share = IAC / WANCSO. Basic earnings per share = $290,000 / 100,000 = $2.90 per share
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