Earnings per Share (EPS) Example Exercise 8 Earnings per Share (EPS) Earnings per share is the net income per share of common stock outstanding during a period.

Net Income available to common stockholders Example Exercise 8 Example Exercise 1-7 Net Income available to common stockholders Earnings per Share Earnings per share is calculated by dividing the net income available to common stockholders by the average number of common shares outstanding. If a company has preferred stock outstanding, any preferred dividends are subtracted from net income before dividing by the average number of common shares outstanding. [CLICK] Corporations whose stock is traded in a public market must report earnings per common share on their income statement.

Example Exercise 8 Example Exercise 1-7 (a) 8 Now, let’s look at the example exercise. First, we must determine the earnings per share for both years. [CLICK] In order to do this we have to determine the net income available to common stockholders by subtracting the preferred dividends to get $330,000. We then divide this amount by the average number of common shares outstanding of 75,000 shares to get $4.40 of earnings per share for 2012. [CLICK] We do a similar calculation for 2011 to come up with $3.60 of earnings per share. [CLICK]

Example Exercise 8 Example Exercise 1-7 (b) Favorable 8 $4.40 $3.60 For part (b), we can determine that the increase in earnings per share from $3.60 [CLICK] to $4.40 indicates a favorable [CLICK] trend in the company’s profitability.

Example Exercise 8  For Practice: PE 8A, PE 8B 8 8A, 8B Refer to Practice Exercises PE 8A and PE 8B to practice calculating earnings per share.  For Practice: PE 8A, PE 8B 5