Earnings Per Share While Simple Corporation has only common stock outstanding, Complex Company has both preferred stock and common stock outstanding.

Complex Company’s preferred stock is convertible into common stock. Complex also has given its corporate officers the right to purchase a substantial number of common shares at a price that presently is well below the market price of the shares.

a. Why is the weighted average number of shares outstanding used in computing earnings per share rather than the number of shares actually outstanding at year-end?

If Simple Corporation sold 60,000 new shares of common stock to the public on April 30, what effect would the sale have on the weighted average shares outstanding used in computing earnings per share? What effect on the weighted average shares outstanding would occur if Simple issued 120,000 new shares of common stock as a stock dividend on October 31?

How does the computation of diluted earnings per share help investors gain a better basis of comparison between two companies such as Simple and Complex?

Should the fact that the officers of Complex Company can exercise their stock options at any point and purchase shares at less than current market price be taken into consideration in the computation of earnings per share? If included, would it be more appropriate to include the options in the computation of basic or diluted earnings per share, or both?