I have to figure the diluted earnings per share. I have a formula to use, but I am not sure how to find weighted average of potential common shares. I also can't figure out how to determine preferred dividends. Please help.

I'd need more detail here, but if you're doing what I think you are...

The weighted average of potential common shares is like doing any weighted average. You're taking into account not just the amount and counting it only once -- you're weighting it by how many months. i.e. 500,000 shares as of 1/1, and then 700,000 shares as of 5/1. That means 500,000 for 4 months, and 700,000 shares for the other 8 months. The 700,000 weights more.

If you wanted to average all 12 months, you'd have to add 500,000 4 times and 700,000 8 times and divide by 12 total months. We just take a short-cut using weighted average:

500,000 x 4 = 2,000,000
700,000 x 8 = 5,600,000

2,000,000 + 5,600,000 = 7,600,000 divided by 12 total months = 633,333.33 average per month.

I don't know what information you have available to figure preferred shares. The description of the stock includes a number indicating what the requirement is for the preferred stock. i.e. 5000 shares 4% preferred stock, $50 par. That 4% is the dividend requirement -- technically it's 4% of par = $2 per share. Or, it could be given as a dollar amount, and it's that amount per share. If you have that info, you should be able to use it to figure what the dividends would be on any amount of shares.