Securities Industry Essentials (SIE) ExamUnderstanding Products and Their RisksMedium
A company has 10 million shares outstanding and earnings of $50 million. It pays out $10 million in dividends annually. What is the company's Earnings Per Share (EPS)?
- A$1.00
- B$0.50
- C$5.00
- D$4.00
Show answer & explanationAnswer & explanation
Correct answer: C. $5.00
Earnings Per Share (EPS) is calculated by dividing a company's total earnings by the number of outstanding shares. In this case, $50 million (earnings) / 10 million (shares) = $5.00 EPS. Dividends paid do not affect EPS.
Why the other options are wrong
- A. Incorrect calculation. This might be a distractor from dividend information.
- B. Incorrect calculation. This might result from dividing dividends by shares.
- D. Incorrect calculation. This might result from subtracting dividends from earnings before dividing by shares.
Earnings Per Share (EPS)
A financial ratio that indicates how much money a company makes for each outstanding share of its stock.
- Calculated as (Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding.
- Higher EPS generally indicates better profitability.
- Used to evaluate a company's financial health and profitability.
Memory trick: EPS: Every Penny Shares.