Which of the following statements is true about market value ratios such as Earnings Per Share (EPS)?

• A. EPS measures the portion of a company's profit allocated to each outstanding share of common stock.
• B. EPS is unaffected by changes in the number of shares outstanding.
• C. EPS is calculated by dividing total assets by the number of shares outstanding.
• D. Market value ratios are only relevant for private companies.

Answer: (A)

Verified step by step guidance

1. Understand the concept of Earnings Per Share (EPS): EPS is a financial metric that measures the portion of a company's profit allocated to each outstanding share of common stock. It is widely used to assess a company's profitability on a per-share basis.
2. Clarify the formula for EPS: EPS is calculated using the formula: $\frac{\mathrm{Net} \mathrm{Income} - \mathrm{Preferred} \mathrm{Dividends}}{\mathrm{Weighted} \mathrm{Average} \mathrm{Shares} \mathrm{Outstanding}}$. This formula highlights that EPS is influenced by both net income and the number of shares outstanding.
3. Evaluate the statement 'EPS is unaffected by changes in the number of shares outstanding': This is incorrect because EPS is directly affected by the number of shares outstanding. If the number of shares increases or decreases, the EPS will change accordingly.
4. Analyze the statement 'EPS is calculated by dividing total assets by the number of shares outstanding': This is incorrect because EPS is calculated using net income, not total assets. Total assets are unrelated to the EPS formula.
5. Consider the statement 'Market value ratios are only relevant for private companies': This is incorrect because market value ratios, including EPS, are primarily relevant for publicly traded companies as they provide insights into the company's financial performance and valuation in the stock market.