Purpose: $$ Understand that EPS cannot be used to compare profitability among companies.

$$ Compute how treasury stock affects EPS.

$$ Identify EPS trends and compare EPS to Market Price to enhance meaning.

Earnings per Share $($EPS$)$ indicates the amount of net income

earned by each individual share of stock held by investors.

Net income $-$ Preferred dividends

EPS $=$ Average number of

common shares outstanding

Use the EPS information below for Athar and Wagdy Companies to answer the following questions.

Athar Company EPS $=$ $$0\mathrm{.}50$ Wagdy Company EPS $=$ $$2\mathrm{.}00$

Net income $=$ $$1,000,000$

Avg. # of CShares OS $2,000,000$

Net income $=$ $$1,000,000$

Avg. # of CShares OS $500,000$

Q$1$ Refer to the EPS information immediately above. Even though Wagdy Company reports

$($greater $/$ lower$)$ EPS, both companies have $($the same $/$ different$)$ net income. A company with

greater EPS $($does $/$ does not$)$ indicate greater profitability.

Q$2$ If Athar Company buys back $1$ million shares of common stock, then treasury stock would

$($increase $/$ decrease$),$ common shares outstanding would $($increase $/$ decrease$),$ and EPS would

$($increase $/$ decrease$)$ to $($$$0\mathrm{.}33/$ $$1/$ $$2)$ per share. The increase in EPS looks $($good $/$ bad$)$ to

shareholders because their proportionate ownership interest is $($increased $/$ decreased$).$

Alternatively, if Athar Company issues an additional $1$ million shares of common stock then

common shares outstanding would $($increase $/$ decrease$)$ and EPS would $($increase $/$ decrease$)$ to

$($$$0\mathrm{.}33/$ $$1/$ $$2)$ per share. The decrease in EPS looks $($good $/$ bad$)$ to shareholders because their

proportionate ownership interest is $($increased $/$ decreased$).$

Athar Company EPS $=$ $$0\mathrm{.}50$ Wagdy Company EPS $=$