Question

Assume that Carla Corp. earned net income of $3,601,000 during 2021. In addition, it had 100,000 shares of 9%, $100 par nonconvertible, noncumulative preferred stock outstanding for the entire year. Because of liquidity considerations, however, the company did not declare and pay a preferred dividend in 2021.

Required:
Compute earnings per share for 2021.

Answer 1

earnings per share = (net income - preferred dividends) / average outstanding shares

• net income = $3,601,000
• preferred dividends = $0 (since they are noncumulative, any preferred dividend that is not paid during the year is lost and will not be paid in the future)
• outstanding shares = ?

we cannot calculate EPS since the number of shares is not given, the formula is incomplete:

EPS = ($3,601,000 - $0) / ? = $3,601,000 / ?

In order to determine EPS, you would need to introduce the number of shares.

E.g. the company has 1,000,000 shares, then EPS = $3,601,000/1,000,000 = $3.60

E.g. the company has 500,000 shares, then EPS = $3,601,000/500,000 = $7.20