The Handy Dandy Corporation has an income statement which indicates that Operating Income is $2,375,486 and Net Profit is $1,375,486.The Corporation currently has 2 million shares of common stock outstanding and 1 million shares of preferred stock which pays a dividend of $1.00 per share.What is this corporation's approximate Earnings per Share?

Question

Quizplus · Accepted Answer

To calculate the earnings per share (EPS), we need to divide the net profit by the total number of outstanding shares. 
Total number of outstanding shares = 2 million common shares + 1 million preferred shares = 3 million shares.
Net profit = $1,375,486
EPS = Net profit / Total number of outstanding shares = $1,375,486 / 3,000,000 = $0.46 per share.

However, since the preferred stock pays a dividend of $1.00 per share, we need to subtract the total dividend paid to preferred stockholders from the net profit before calculating the EPS for common stockholders. 
Total dividend paid to preferred stockholders = 1 million preferred shares x $1.00 per share = $1,000,000
Adjusted net profit available to common stockholders = Net profit - Total dividend paid to preferred stockholders = $1,375,486 - $1,000,000 = $375,486
Adjusted EPS = Adjusted net profit available to common stockholders/ Total number of outstanding shares = $375,486 / 2,000,000 = $0.187743 or approximately $0.19 per share.

Therefore, the best choice is B.

The Handy Dandy Corporation Has an Income Statement Which Indicates