Final answer:
The earnings per share (EPS) for ABC Corp. is $0.35, calculated by subtracting the preferred dividends of $50,000 from the net profit of $400,000 to get $350,000, and then dividing by the 1,000,000 common shares outstanding.
Step-by-step explanation:
To calculate the earnings per share (EPS) for ABC Corp., you subtract any preferred dividends from the net profit, then divide the resulting amount by the number of common shares outstanding. ABC corp. had a net profit of $400,000, preferred dividends of $50,000, and common dividends of $75,000. However, only the preferred dividends are subtracted from the net profit when calculating EPS since common dividends do not factor into this metric. After subtracting preferred dividends from the net profit, we are left with $350,000 ($400,000 - $50,000). Then, we divide this figure by the number of common shares outstanding, which is 1,000,000 shares.
The EPS is thus $0.35 per share ($350,000 / 1,000,000 shares).
To relate this to a case like Babble, Inc., investors might look at the EPS as an indicator of a company's profitability. If Babble Inc. expected profits that would be paid out as dividends, an investor could calculate the present value of these future dividends. For ABC Corp., the amount of $0.35 per share reflects the portion of profits attributed to each share and could influence an investor's decision on what price they are willing to pay for a share in the current market.