Question

A company had 400,000 common shares outstanding during 2020. It also had 100,000 shares of 8%, $100 par nonconvertible and cumulative preferred stock outstanding for the entire year of 2020. The company did not declare and pay a preferred dividend in 2019 and 2020. It earned net income of $16,000,000 during 2020. Compute basic earnings per share for 2020. Round to the nearest penny if necessary.

Answer 1

Answer - 38 per share

Given-

Outstanding Common Shares = 400,000

Net Income = $ 16,000,000

Outstanding Preferred Stocks = 100,000

To Find - Compute Basic Earning per Share (EPS).

Solution- Formula-

EPS = Net Income - Preferred Dividend / Weighted Average Number of Shares Outstanding

= 16,000,000 - 800,000 / 400,000

= 15,200,000 / 400,000

= 38 per share ( Answer)

Working Note-

1- In this question, no repurchase or new issue of Common Stock is given so Weighted Average Number of Shares Outstanding are 400,000.

2- Preferred Dividend = 100,000 * 100 * 8 /100

= $ 800,000

here, 100 is par value of 100,000 Preferred stocks of 8%.