Question

Can you please use the box in the question to explain

Bayou Energy Inc. had 200,000 shares of common stock outstanding at the end of 2016. Bayou Energy also had 10,000 shares of 6%, $50 par non-convertible preferred stock outstanding throughout the year. During 2017, the following transactions on common stock took place.

Mar. 1, 2017, Issued of 28,000 shares                                       

June 1, 2017, Stock split 3 for 1

October 1, 2017, Issued 96,000 shares                                                                               

December 1, 2017, Purchased 54,000 shares to be held in treasury                                      

In addition, Bayou Energy has the following stock option, which is only potentially dilutive security:   

Stock option: Exercise price on stock option is $15 per share. Average market price in 2017 was $50 (market price and exercise price adjusted for split). Total number of options is 36,000 shares.

Bayou Energy declared the required preferred stock dividend during the year. Net income for the year was $1,078,040. Bayou’s fiscal year ends December 31.

Compute the basic earnings per share for 2017. (Round to the nearest penny.)

Weighted average shares outstanding during the year for Basic EPS:

Period	Fraction of Year	Shares	Restatement for stock split	W. Avg. Shares

         Basic EPS =  

            

Compute the diluted earnings per share for 2017. (Round to the nearest penny.)

Answer 1

Table for weighted average number of shares:

Restatement for stock split is done in order to accomodate the periods prior to the stock split. The number of shares outstanding before the split is multiplied by 3 in order to compute the correct EPS. Weighted average shares = Restatement for stock split x Fraction of year/12

Total weighted average shares = 689,500.

Basic EPS is as below:

Diluted EPS to be calculated after adding the number of shares issued on account of stock options:

Weighted average number shares + number of share options = 689,500 + 36,000 = 725,500

Diluted EPS = 1,048,040/725,500 = 1 per share