Question

As of November 29, it appears that Notel will report earnings per share (EPS) of $1.15 for the quarter ended November 30. Which of the following events would cause this EPS number to decrease, assuming the event occurs the morning of November 30?
A.

The company pays a supplier for inventory bought on account.

B.

The company declares, but does not pay, a cash dividend.

C.

The company purchases 10 shares of common stock in another company.

D.

The company reissues the treasury stock it holds.

Answer 1

Answer: D.  The company reissues the treasury stock it holds.

Explanation:

Earnings per share is calculated by dividing the Net Income by the weighted average number of shares that a company has outstanding. If the company reissues treasury stock, this would increase the number of average stock outstanding thereby increasing the denominator of the EPS equation which would have the effect of reducing the Earnings per share.

For instance, if a company had net income of $50 and common equity outstanding of $40, the EPS would be;

= 50/40

= $1.25

If the company reissues treasury stock of $30, the EPS would change to;

= 50/ (40 +30)

= $0.71