Samuels, Inc. reported net income for 2011 is $105,000. During 2011 the company had 5,000 shares of $100 par, 5% preferred stock and 20,000 of $5 par common stock outstanding. Samuels’ earnings per share for 2011 is
A.$4.00
B.$5.25
C.$6.50
D.$5.00
Step 1: Determine amount of dividends that preferred shareholders are entitled to:
5000*100*5% = 25,000
Step 2: Determine amount of earnings left over for common shareholders after the payment of preferred dividends:
105,000-25,000 = 80,000.
Step 3: Use the EPS formula to determine EPS:
EPS = Earnings available for common shareholders/common shares outstanding
80,000/20,000 = $4.00
Note: Another way of writing the EPS formula is as follows:
(Net income - preferred dividends)/average outstanding shares.
5.25
4.00
To calculate the earnings per share (EPS) for Samuels, Inc. in 2011, we need to divide the net income by the weighted average number of shares outstanding.
First, we need to calculate the weighted average number of shares outstanding by taking into account both the preferred stock and the common stock.
1. Calculate the weighted average number of preferred stock shares:
The preferred stock has a total of 5,000 shares outstanding.
2. Calculate the weighted average number of common stock shares:
The common stock has a total of 20,000 shares outstanding.
Now, we need to determine the weightings of the preferred stock and common stock in the calculation.
3. Calculate the weight of the preferred stock:
The preferred stock has a par value of $100 and a 5% dividend rate.
Weight of the preferred stock = (par value of preferred stock * number of preferred stock shares) / (par value of preferred stock)
Weight of the preferred stock = ($100 * 5,000) / $100 = 5,000
4. Calculate the weight of the common stock:
The common stock has a par value of $5.
Weight of the common stock = (par value of common stock * number of common stock shares) / (par value of common stock)
Weight of the common stock = ($5 * 20,000) / $5 = 20,000
5. Calculate the weighted average number of shares outstanding:
Weighted average number of shares outstanding = Weight of the preferred stock + Weight of the common stock
Weighted average number of shares outstanding = 5,000 + 20,000 = 25,000
Finally, we can calculate the earnings per share (EPS):
EPS = Net income / Weighted average number of shares outstanding
EPS = $105,000 / 25,000
EPS = $4.20
Therefore, Samuels, Inc.'s earnings per share for 2011 is $4.20.
None of the given choices match the calculated EPS, so none of the given options (A, B, C, D) are correct.