Final answer:
To calculate earnings per share (EPS), preferred dividends are subtracted from net income to determine the earnings available to common stockholders. EPS is calculated by taking the adjusted net income and dividing it by the number of outstanding common shares.
Step-by-step explanation:
To arrive at earnings per share (EPS), preferred dividends are subtracted from net income when calculating the earnings available to common stockholders. Earnings per share is a key financial metric used to assess a company's profitability on a per-share basis.
The formula for calculating EPS is the net income minus preferred dividends, divided by the number of outstanding common shares. In mathematical terms, this can be represented as:
EPS = (Net Income - Preferred Dividends) / Average Outstanding Common Shares
For example, if a company's net income is 51.3 million dollars and it has 200 shares outstanding, then the calculation of EPS would be adjusted for any preferred dividends before dividing by the number of shares.