On December 31, 2015, Merlin Company had outstanding 400,000 shares of common stock and 40,000 shares of 8% cumulative preferred stock (par $10). On February 28, 2016, Merlin issued an additional 36,000 shares of common stock. A 10% stock dividend was declared and distributed on July 1, 2016. On September 1, 2016, 9,000 shares were retired. At year-end, there were fully vested incentive stock options outstanding for 30,000 shares of common stock (adjusted for the stock dividend). The exercise price was $18. The market price of the common stock averaged $20 during the year. Also outstanding were $1,000,000 face amount of 10% convertible bonds issued in 2013 and convertible into 50,000 common shares (adjusted for the stock dividend). Net income was $900,000. The tax rate for the year was 40%. Required: Compute basic and diluted EPS (rounded to 2 decimal places) for the year ended December 31, 2016.

You must show your computations to receive any credit.

Hint:

Basic = $1.85

Diluted = $1.77