Explain why the EPS differs when other measures of activity and profitability ar

Question

Explain why the EPS differs when other measures of activity and profitability are similar.

What factors contribute to and limit the comparability of these data?

Fredrica Brown has $200,000 that she plans to invest in growth stocks. She has narrowed her choices to two companies in the same industry, White Inc. and Adam Inc. Each company has a documented history of growth and an established, strong position within the industry. Last year, each company reported net income of $10 million and a return on owners’ investment of 17%; however, White reported EPS of $1.32, and Adam reported EPS of $2.75.

Explanation / Answer

EPS = (NET INCOME - PREFERRED DIVIDENDS) / WEIGHTED AVERAGE OUTSTANDING COMMON SHARES

Here three factors effect the earnings per share

1. Net Income

2. Preferred dividends

3. Nuber of outstanding common stock shares.

If net income is constant,  

High preferred dividends payment can results decrease in EPS

Or higher number of outstanding common shares results decrease in EPS.

THIS TWO THINGS ARE REASONS FOR THE DIFFERENCE IN EPS OF White Inc. and Adam Inc.  

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