If a company's earnings per share and return on equity both increase:
A)it could mean that net income is rising or it could mean that the number of outstanding shares is falling.The first is sustainable;the second cannot be continued indefinitely.
B)it means that the company is becoming more profitable and stockholders will see greater returns.
C)it means that the company's tax liability will rise in the future and cause a decline in profitability.
D)it could mean that net income is rising or it could mean that the number of outstanding shares is falling.In either case,stockholders can expect greater future returns indefinitely.

Question

Quizplus · Accepted Answer

EPS = (Net income − Preferred dividends)÷ Average number of common shares outstanding
Return on equity (ROE)= (Net income − Preferred dividends)÷ Average common stockholders' equity
EPS and ROE will rise if net income is rising or if the number of outstanding shares is falling.A rise in net income can be sustained,but a constant fall in the number of shares outstanding cannot continue indefinitely.

If a Company's Earnings Per Share and Return on Equity