Question

Epic Company earned net income of \(900,000 this year. The number of common shares outstanding during the entire year was 400,000, and preferred shareholders received a \)20,000 cash dividend. Compute Epic Company’s basic earnings per share

Short answer

Epic Company's basic earnings per share are $2.20.

Step-by-step solution

Meaning of Earning Per Share

Earnings per share are the amount of income earned per share by each shareholder.

Computation of Earnings per Share

$\begin{array}{c}\mathbf{B}\mathbf{a}\mathbf{s}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{a}\mathbf{r}\mathbf{n}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{s}\mathbf{p}\mathbf{e}\mathbf{r}\mathbf{s}\mathbf{h}\mathbf{a}\mathbf{r}\mathbf{e}\mathbf{=}\frac{\mathbf{(}\mathbf{N}\mathbf{e}\mathbf{t}\mathbf{i}\mathbf{n}\mathbf{c}\mathbf{o}\mathbf{m}\mathbf{e}\mathbf{-}\mathbf{P}\mathbf{r}\mathbf{e}\mathbf{f}\mathbf{e}\mathbf{r}\mathbf{r}\mathbf{e}\mathbf{d}\mathbf{d}\mathbf{i}\mathbf{v}\mathbf{i}\mathbf{d}\mathbf{e}\mathbf{n}\mathbf{d}\mathbf{s}\mathbf{)}}{\mathbf{w}\mathbf{e}\mathbf{i}\mathbf{g}\mathbf{h}\mathbf{t}\mathbf{e}\mathbf{d}\mathbf{a}\mathbf{v}\mathbf{e}\mathbf{r}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{c}\mathbf{o}\mathbf{m}\mathbf{m}\mathbf{o}\mathbf{n}\mathbf{s}\mathbf{h}\mathbf{a}\mathbf{r}\mathbf{e}\mathbf{s}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{900}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{000}}{\mathbf{400}\mathbf{,}\mathbf{000}}\\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{.}\mathbf{20}\mathbf{p}\mathbf{e}\mathbf{r}\mathbf{s}\mathbf{h}\mathbf{a}\mathbf{r}\mathbf{e}\end{array}$

Thus, the basic earnings per share are $2.20.