At December 31, 2015, the Barack Obama Company had 600,000 shares of common stoc

Question

At December 31, 2015, the Barack Obama Company had 600,000 shares of common stock outstanding. Obama sold 40,000 shares on March 31 and reacquired 60,000 shares on September 30. Net income for 2016 was $1,160,000. The tax rate is 40%. The average market price during 2016 was $40. Obama's capital structure contained the following items. 20,000 shares of 8% convertible cumulative preferred stock, par $100, sold at 110. Each shares of preferred stock is convertible into 5 shares of common stock. $2,000,000 face value of 7.5% bonds sold at par. $1,000,000 face value of 7% convertible bonds sold to par. Each $1,000 bond is convertible into 40 shares of common stock. $3,000,000 face value of 6% convertible bonds sold to yield 7%. Unamortized bond discount is $100,000 at December 31, 2016. Each $1,000 bond is convertible into 27 shares of common stock. [Remember: interest expense is calculated using the effective interest method] 20,000 options to buy common stock at $30 per share. 20,000 options to buy common stock at $42 per share. 40,000 options to buy common stock at $25 per share. Required Calculate the basic earnings per share. Calculate the diluted earnings per share.

Explanation / Answer

for payment of dividend we need to consider only revenues or profits from operating activites only.

in the given case the extraordinary gain of $300,000 should not consider for payment of dividend.

the only consideration is $682,500 and the total shares outstanding are only we consider the shares on the last day of the accounting year, i.e. 600,000 only.

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