Earnings per Share and Extraordinary Items The Stockholders’ Equity section of the balance sheet for Lahey Construction Company at the end of 2010 is as follows:

9%, $10 par, cumulative preferred stock, 500,000 shares authorized, 200,000 shares issued and outstanding $ 2,000,000 Additional paid-in capital on preferred 7,500,000 Common stock, $1 par, 2,500,000 shares authorized, 1,500,000 shares issued and outstanding 1,500,000 Additional paid-in capital on common 21,000,000 Retained earnings 25,500,000 Total stockholders’ equity $57,500,000 The lower portion of the 2010 income statement indicates the following:

Net income before tax $ 9,750,000 Income tax expense (40%) (3,900,000)

Income before extraordinary items $ 5,850,000 Extraordinary loss from fl ood $(6,200,000)

Less related tax effect (40%) 2,480,000 (3,720,000)

Net income $ 2,130,000 Assume that the number of shares outstanding did not change during the year.

Required 1. Compute earnings per share before extraordinary items.

2. Compute earnings per share after the extraordinary loss.

3. Which of the two EPS ratios is more useful to management? Explain your answer.

Would your answer be different if the ratios were to be used by an outsider

(e.g., by a potential stockholder)? Why or why not?

AppendixLO1