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Ratios: Earnings Per Share (EPS) quiz #1 Flashcards

Ratios: Earnings Per Share (EPS) quiz #1
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  • What is the formula for calculating basic Earnings Per Share (EPS)?
    EPS = (Net Income - Preferred Dividends) / Average Number of Shares of Common Stock Outstanding.
  • Where is Earnings Per Share (EPS) typically displayed on the financial statements?
    EPS is shown at the bottom of the income statement, under net income.
  • Why are preferred dividends subtracted from net income when calculating EPS?
    Preferred dividends are subtracted because they are paid to preferred stockholders before common stockholders, so only the remaining income is available to common shareholders.
  • How do you calculate the average number of shares of common stock outstanding for EPS?
    Add the beginning and ending number of shares outstanding and divide by 2.
  • If only one number for shares outstanding is provided, how is it used in the EPS calculation?
    Use the provided number as the denominator without calculating an average.
  • What does a higher EPS generally indicate about a company’s performance?
    A higher EPS generally indicates better profitability and performance.
  • What is the main purpose of the EPS ratio for investors?
    EPS helps investors assess how much income is earned per share, aiding investment decisions.
  • What type of shares are considered in the denominator of the basic EPS formula?
    Only common shares outstanding are considered in the denominator.
  • What is the difference between basic EPS and diluted EPS?
    Basic EPS uses current shares outstanding, while diluted EPS considers potential shares from convertible securities and options.
  • Are you required to calculate diluted EPS in this class?
    No, only basic EPS is required for this class.
  • Why is EPS considered a key profitability ratio?
    EPS shows the amount of income earned for each share of common stock, reflecting profitability.
  • How can EPS be used to analyze a company’s performance over time?
    EPS can be tracked year over year to analyze trends in profitability.
  • What does the acronym EPS stand for?
    EPS stands for Earnings Per Share.
  • If a company has no preferred stock, how does that affect the EPS calculation?
    If there are no preferred dividends, EPS is simply net income divided by average common shares outstanding.
  • What is the impact of issuing more common shares on EPS, assuming net income stays the same?
    Issuing more shares increases the denominator, which decreases EPS if net income remains unchanged.
  • Why do investors prefer a higher EPS?
    A higher EPS means more earnings are allocated to each share, indicating greater profitability for shareholders.
  • What is meant by 'dilution' in the context of EPS?
    Dilution refers to the potential decrease in EPS if more shares are created through options, convertible debt, or other means.
  • Is the market price of the stock used in the EPS calculation?
    No, only the number of shares is used, not the market price.
  • What is the significance of tracking EPS growth over several years?
    Tracking EPS growth helps assess whether a company’s profitability is improving over time.
  • What is the main focus of EPS calculations in this class?
    The main focus is on understanding and calculating basic EPS, not diluted EPS.