Question

The balance sheets at the end of each of the first two years of operations indicate the following:

Year 2 Year 1
Total current assets $600,000 $560,000
Total investments 60,000 40,000
Total property, plant, and equipment 900,000 700,000
Total current liabilities 150,000 80,000
Total long-term liabilities 350,000 250,000
Preferred 9% stock, $100 par 100,000 100,000
Common stock, $10 par 600,000 600,000
Paid-in capital in excess of par—common stock 60,000 60,000
Retained earnings 325,000 210,000

If net income is $125,000 and preferred dividends are $9,000 for Year 2, what is the earnings per share on common stock for Year 2?
a. $1.93
b. $0.19
c. $1.75
d. $2.08

Answer 1

The earnings per share (EPS) on common stock for Year 2 is $1.93, calculated by subtracting preferred dividends from net income and dividing by the number of common shares outstanding.

Step-by-step explanation:

To calculate the earnings per share (EPS) on common stock for Year 2, we must subtract the preferred dividends from the net income and then divide the remainder by the number of common shares outstanding. Here are the steps:

• Determine the net income available to common shareholders by subtracting the preferred dividends from the net income: $125,000 - $9,000 = $116,000.
• Since the common stock is $10 par and there's $600,000 worth of it, there are 60,000 shares of common stock ($600,000 / $10 = 60,000).
• Divide the net income available to common shareholders by the number of common shares: $116,000 / 60,000 shares = $1.93.

Therefore, the earnings per share on common stock for Year 2 is $1.93.