Question

The denominator in the earnings per share formula is? a.preferred dividends. b.net income. c.number of preferred shared outstanding. d.number of common shares outstanding.

Answer 1

The denominator in the earnings per share formula is number of common shares outstanding.

What is the denominator used in the computation of earnings per share?

• The weighted average of the outstanding shares of common stock serves as the numerator of the earnings per share.
• The "per share" part necessitates further computation when the number of common shares changes in the middle of the year.
• The weighting of the per share part depends on how long each share number has been in circulation.

How are basic earnings per share determined?

• Basic EPS is calculated by dividing net income by the weighted average of the common shares outstanding for the relevant period.
• Preferred dividends should be removed from the net income because they are not available to common stockholders.
• Net income can also be broken down into "continuing operations" P&L and "total P&L".

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