How are earnings per share calculated?
A) the net income of the firm, divided by the amount of capital invested by the owners
B) the number of shares outstanding, divided by the value of owners' equity
C) the net income of the firm less any preferred dividend payout, divided by the number of shares outstanding
D) the number of shares outstanding, divided by the net income of the firm

Question

Quizplus · Accepted Answer

Earnings per share (EPS) is calculated by dividing the net income of the firm less any preferred dividend payout by the number of shares outstanding. This formula gives the amount of earnings attributable to each share of stock. Option A is incorrect because it divides net income by the amount of capital invested by the owners, which is not the same as the number of shares outstanding. Option B is incorrect because it divides the number of shares outstanding by the value of owners' equity, which gives a different result than EPS. Option D is incorrect because it divides the number of shares outstanding by net income, which does not take into account any preferred dividend payout.

How Are Earnings Per Share Calculated