Earnings Per Share After finally paying off your car, you have saved enough money to take the plunge in the stock market. You have been particularly interested in two companies, but only have enough money to invest in one. In trying to make a choice between them, you have paid special attention to income, and have focused on the growth in income over the past several years. Dawn Company reported net income of $4 million five years ago, and it now reports net income of $10 million. That looks great, but Boomer Company’s net income has grown from $3 million to $16 million during the same period. Of course, that latest income figure includes an extraordinary gain of $4 million, but still, that’s pretty impressive growth. The other good thing about Boomer is that it has virtually no debt, financing all of its growth from operations and by issuing stock. Boomer now has 6 million shares outstanding, having issued about 2.5 million during the past five years.

Dawn’s shares outstanding have remained constant at 4 million.

a. How would you analyze the earnings growth of Dawn and Boomer? What income numbers would you use, and what role would earnings per share play?

b. Discuss how the growth of the two companies compares.

Based on an analysis of earnings, do you judge one of the companies as being better than the other for a potential stock investment? Explain.

c. List at least two pieces of information in addition to earnings data that you would find crucial in making your investment decision. Explain why.