Interpreting changes in earnings per share Company A and Company B both start 2008 with $1 million of shareholders’ equity and 100,000 shares of common stock outstanding. During 2008, both companies earn net income of $100,000, a rate of return of 10% on common shareholders’ equity at the beginning of 2008. Company A declares and pays $100,000 of dividends to common shareholders at the end of 2008, whereas Company B retains all its earnings and declares no dividends. During 2009, both companies earn net income equal to 10% of shareholders’ equity at the beginning of 2009.
a. Compute earnings per share for Company A and for Company B for 2008 and for 2009.
b. Compute the rate of growth in earnings per share for Company A and Company B. comparing earnings per share in 2009 with earnings per share in 2008.
c. Using the rate of growth in earnings per share as the criterion, which company’s management appears to be doing a better job for its shareholders? Comment on this result.