Question was: Common Stock: 20,000 Shares Preferred Stock: Dividents of $45,000 Net Income: $120,000, dividend to common shareholders: $20,000 The answer key : Basic EPS: (120,000-45,000)/20,000 Why not include dividends to common shareholders and subtract this out from numerator? I thought these common dividends were NOT included in net income figure, therefore you need to take it out? Thanks guys,
Unlike preferred dividends (which are cummulative), you can actually not pay common stock dividends (for instance Google is not paying nor they will ever pay, or so they declare, Yahoo is not paying).
You do not subtract common stock dividends because EPS is actually earnings for the common stock holders so deducting their dividends wont make sense. Hope this makes this things a lil clear…