CFA Level IFinancial Statement AnalysisMedium
A company reports net income of $300,000. It has 1,000,000 common shares outstanding and 200,000 shares of 5% preferred stock with a par value of $10 per share. What is the company's Earnings Per Share (EPS)?
- A$0.25
- B$0.30
- C$0.20
- D$0.35
Show answer & explanationAnswer & explanation
Correct answer: C. $0.20
To calculate EPS, preferred dividends must be subtracted from net income. Preferred dividends = 200,000 shares * $10 par * 5% = $100,000. Earnings available to common shareholders = $300,000 - $100,000 = $200,000. EPS = $200,000 / 1,000,000 shares = $0.20.
Why the other options are wrong
- A. This incorrectly uses a different preferred dividend amount or calculation.
- B. This incorrectly divides total net income by common shares, ignoring preferred dividends.
- D. This incorrectly adds preferred dividends or uses an incorrect share count.
Basic Earnings Per Share (EPS)
Basic EPS measures the portion of a company's profit allocated to each outstanding share of common stock.
- Key profitability metric for common shareholders.
- Calculated as (Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding.
- Preferred dividends are subtracted because they are paid before common shareholders.
Memory trick: Net income, minus the preferred cut, then shared among common stock.