Question

When a corporation has both preferred and common stock outstanding, earnings per share is computed by dividing net income
a. by ending common shares outstanding.
b. by weighted average common shares outstanding.
c. less preferred dividends by ending common shares outstanding.
d. less preferred dividends by the weighted average of common shares outstanding.

Answer 1

Answer:

D) less preferred dividends by weighted average of common shares outstanding.

Explanation:

When you want to calculate earnings per stock, you will do it for common stocks, not preferred stock. Therefore the dividends paid (or payable) to preferred stockholders must be deducted from net income, and then you divide net income by common stocks outstanding to get earnings per stock.