30) Earnings Available for Common Stock

Let's assume that a corporation has the following stockholders' equity at December 31:

Stockholders' Equity
Paid-in capital
9% preferred stock, $100 par, 300 shares authorized and issued	$   30,000
Common stock, $0.10 par, 10,000 shares authorized, 2,000 shares issued and outstanding	200
Paid-in capital in excess of par - common	49,800
Total paid-in capital	80,000
Retained earnings	28,000
Total stockholders' equity	$108,000

Additional information:

1. The corporation's accounting year is the calendar year.

2. The corporation's net income after taxes is $10,000.

3. The number of shares of common stock outstanding was 600 shares for the first four months of the year. On May 1 the corporation issued an additional 900 shares. On October 1 it issued an additional 500 shares.

4. The shares of preferred stock were outstanding for the entire year.

The earnings (net income after income taxes) available for the common stockholders is:

Corporation's net income after income taxes	$ 10,000
Less: Preferred dividend requirement*	–  2,700
Earnings available for common stock	$   7,300

*The preferred dividend requirement is the annual dividend of $9 per share (9% times $100 par value) times the 300 shares of preferred stock outstanding.

31) Weighted-Average Number of Shares of Common Stock

Since the earnings occurred throughout the entire year, we need to divide them by the number of shares that were outstanding throughout the entire year. During the first four months only 600 shares were outstanding, during the next five months 1,500 shares were outstanding, and for the final three months of the year 2,000 shares of common stock were outstanding. This situation requires that we come up with an average number of shares of common stock for the year.

Shares of Common Outstanding	Months Outstanding	No. of Months Divided by 12	Weighted Average No. of Common Shares
600	Jan, Feb, Mar, Apr	4/12	200
1,500	May, Jun, Jul, Aug, Sep	5/12	625
2,000	Oct, Nov, Dec	3/12	500
			1,325

As the calculation shows, the weighted-average number of shares of common stock for the year was 1,325.

It's a good idea to test this answer to be sure it's reasonable. During five of the months (May - Sep.) the number of shares of common stock outstanding was 1,500 shares. During the remainder of the year, there were more months with less than 1,500 shares outstanding. Thus, the figure of 1,325 looks reasonable.

32) Earnings per Share of Common Stock

After recognizing the preferred stockholders' required dividend, there was $7,300 ($10,000 minus $2,700) ofearnings available for the common stockholders. The $7,300 was earned throughout the year, so we need to divide that amount by the weighted-average number of shares of common stock outstanding throughout the year:

The earnings per share (EPS) of common stock = earnings available for common stock divided by the weighted-average number of common shares outstanding:

EPS = $7,300 ÷ 1,325 shares of common stock

EPS = $ 5.51 per share of common stock