Question

Which of the following reasons best explains why earnings per share (EPS) is such a popular measure to evaluate a company?

Multiple Choice
a. EPS makes it easy to compare one company with another.
b. EPS is an excellent measure of how efficiently long-lived assets are being utilized.
c. EPS provides information that investors can factor into their expectations about future dividends and stock prices.
d. EPS provides specific information about the ability of a company to repay its long-term debts.

Answer 1

EPS is popular because it provides a straightforward way to compare financial performance between companies and factors into investor expectations about future dividends and stock prices, with option (a) being the correct answer.

Step-by-step explanation:

The reason that earnings per share (EPS) is such a popular measure to evaluate a company primarily lies in its utility for comparing one company's financial performance to another's in a relatively straightforward manner. Option (a) EPS makes it easy to compare one company with another is the correct answer for why EPS is a popular measure for evaluating companies.

EPS is a widely used metric in finance that allows investors to assess a company's profitability on a per-share basis, thereby providing a clear framework for comparison across companies of different sizes and within various industries. It also factors into investor expectations about future dividends and stock prices, helping them make more informed investing decisions. In contrast, options (b), (d), and the alternative understandings of EPS, such as its reflection of efficiency in using long-lived assets or ability to repay debt, are not the primary purposes of this metric.