Problem #2: Orlando Corporation is preparing the financial statements for the annual report to its shareholders for the fiscal year ended August 31, 2017. The income from operations for fiscal year 2017 was $1,250,000. The company incurred a 6% interest expense on $3,000,000 of debt, an obligation outstanding for the entire fiscal year that requires interest-only payments. The company uses a 40% effective tax rate for income taxes.

The capital structure of Orlando Corporation on September 1, 2016, at the beginning of its fiscal year, consisted of 2 million shares of common stock outstanding and 50,000 shares of $100 par value, 5%, cumulative preferred stock. There were no preferred dividends in arrears, and the company had not issued any convertible securities, options, or warrants.

On December 1, 2016, Orlando sold an additional 400,000 shares of the common stock at $34 per share. Orlando distributed a 10% stock dividend on common shares outstanding on January 1, 2017.

Instructions

1. Identify whether the capital structure at Orlando Corporation is a simple or complex capital structure, and explain why.
2. Determine the weighted-average number of shares that Orlando Corporation would use in calculating earnings per share for the fiscal year ended August 31, 2017.
3. Compute earnings per share.

(CMA adapted)