rpose:

RATIO ANALYSIS: EARNINGS PER SHARE

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

Net income Avg. # of CShares OS

EPS $=$ $$0\mathrm{.}50=$ $$1,000,000$

$2,000,000$ Wagdy Company Net income 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

Year $1$ Year $2$ $$0\mathrm{.}10$

$$0\mathrm{.}20$

EPS $=$ $$0\mathrm{.}50$ Year $3$ $$0\mathrm{.}50$

Wagdy Company Year $1$

EPS $$8$

Year $2$ $$4$

EPS $=$ $$2\mathrm{.}00$ Year $3$ $$2$

Q$3$ Refer to the EPS information immediately above. EPS for Athar Company has a$/$an $($increasing $/$ decreasing$)$ trend, whereas Wagdy Company has a$/$an $($increasing $/$ decreasing$)$ trend. EPS $($can $/$ cannot$)$ be more meaningful when compared over time.

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

Market Price $=$ $$6/$share $=$ PE Ratio EPS

$$0\mathrm{.}50$ of $12$ Wagdy Company $$2\mathrm{.}00$ EPS $=$ $$2\mathrm{.}00$

Market Price $$60/$share $=$ PE Ratio EPS

of $30$

Q$4$ Refer to the EPS and the Market Price information immediately above. The PE Ratio measures how expensive a stock is; how much investors are willing to pay for each $$1$ of EPS. A PE below $10$ is considered a $$bargain$$ stock, whereas a PE of more than $20$ is considered $$expensive$.$ Measured by the PE ratio, Athar Company stock is $($a bargain $/$ moderately$-$priced $/$ expensive$),$ while Wagdy Company stock is $($a bargain $/$ moderately$-$priced $/$ expensive$).$ EPS $($can $/$