Question

Samuels, Inc. reported net income for 2011 is $105,000. During 2011 the company had 5,000 shares of $100 par, 5% preferred stock and 20,000 of $5 par common stock outstanding. Samuels’ earnings per share for 2011 is

A.$4.00

B.$5.25

C.$6.50

D.$5.00

Answer 1

Step 1: Determine amount of dividends that preferred shareholders are entitled to:
5000*100*5% = 25,000
Step 2: Determine amount of earnings left over for common shareholders after the payment of preferred dividends:
105,000-25,000 = 80,000.
Step 3: Use the EPS formula to determine EPS:
EPS = Earnings available for common shareholders/common shares outstanding
80,000/20,000 = $4.00

Note: Another way of writing the EPS formula is as follows:
(Net income - preferred dividends)/average outstanding shares.

Answer 2

5.25

Answer 3

4.00