Purpose: stand that EPS cannot be used to compare pront Compute how treasury stock affects EPS. mong companies. 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. EPS = Net Income-Preferred dividends Average number of common shares outstanding Use the EPS information below for Athar and Wogdy Companies to answer the following questions. Net income Wagdy Company EPS = $2.00 = $1.000.000 Athar Company EPS = $0.50 = $1.000.000 Net income Avg. # of CShares OS 2,000,000 Avg. # of CShares OS 500,000 Q1 Q2 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. 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 ($0.33/$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 ($0.33/$1/$2) per share. The decrease in EPS looks (good/bad) to shareholders because their proportionate ownership interest is (increased / decreased). Athar Company EPS = $0.50 Year 1 Year 2 Year 3 EPS $0.10 $0.20 $0.50 Wagdy Company EPS = $2.00 Year 1 Year 2 Year 3 EPS $8 $4 $2 Q3 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 = $0.50 Market Price EPS = $6/share PE Ratio $0.50 of 12 Wagdy Company EPS = $2.00 Market Price $60/share EPS PE Ratio of 30 $2.00 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/ cannot) be more meaningful when compared to market price per share. Q4 90