Which of the following statements about Earnings Per Share (EPS) is correct?

• A. EPS is only relevant for companies that do not pay dividends.
• B. EPS measures the portion of a company's profit allocated to each outstanding share of common stock.
• C. EPS is calculated by dividing total assets by the number of shares outstanding.
• D. EPS is unaffected by the issuance of new shares.

Answer: (B)

Verified step by step guidance

1. Step 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 a key indicator of a company's profitability and is widely used by investors to assess the financial health of a company.
2. Step 2: Clarify the formula for calculating EPS. The formula is: EPS = (Net Income - Preferred Dividends) / Weighted Average Number of Common Shares Outstanding. This formula ensures that the profit attributable to common shareholders is divided by the number of shares they hold.
3. Step 3: Evaluate the first statement: 'EPS is only relevant for companies that do not pay dividends.' This is incorrect because EPS is relevant for all companies with common stock, regardless of whether they pay dividends. EPS reflects profitability, not dividend policy.
4. Step 4: Evaluate the second statement: 'EPS measures the portion of a company's profit allocated to each outstanding share of common stock.' This is correct because it aligns with the definition and formula of EPS.
5. Step 5: Evaluate the third and fourth statements: 'EPS is calculated by dividing total assets by the number of shares outstanding' and 'EPS is unaffected by the issuance of new shares.' Both are incorrect. EPS is calculated using net income, not total assets, and the issuance of new shares affects the weighted average number of shares outstanding, which impacts EPS.