Which one of the following is a correct equation to calculate earnings per share?
A) (ROA) × (book value per share)
B) (profit margin) × (total asset turnover) × (equity multiplier) × (book value per share)
C) (profit margin) × (equity multiplier) × (book value per share)
D) (profit margin) × (book value per share)

Question

Quizplus · Accepted Answer

Earnings per share (EPS) is calculated by dividing the net income by the number of outstanding shares. The formula given in option B, (profit margin) × (total asset turnover) × (equity multiplier) × (book value per share), is a rearrangement of the DuPont identity, which breaks down ROE into three components: profit margin, asset turnover, and financial leverage (equity multiplier). However, it does not directly calculate EPS but rather gives an insight into the factors affecting a company's financial performance. The correct explanation for EPS calculation involves net income and outstanding shares, which is not precisely represented in any of the options provided. My initial response was incorrect as none of the options directly calculate EPS in its standard form.

Which One of the Following Is a Correct Equation to Calculate