Tougher Company's current year income statement showed an EPS of \$1.25 per share. If total common equity totaled \$600,000 (40,000 common shares) and preferred dividends were \$10,000 (10,000 preferred shares), what was net income during the period?

• A. \$50,000
• B. \$60,000
• C. \$62,500
• D. \$72,500

Answer: (B)

Verified step by step guidance

1. Start by understanding the formula for Earnings Per Share (EPS): \( \text{EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Number of Common Shares}} \).
2. Given that EPS is \$1.25, preferred dividends are \$10,000, and there are 40,000 common shares, substitute these values into the EPS formula: \( 1.25 = \frac{\text{Net Income} - 10,000}{40,000} \).
3. Rearrange the equation to solve for Net Income: \( \text{Net Income} - 10,000 = 1.25 \times 40,000 \).
4. Calculate the right side of the equation: \( 1.25 \times 40,000 \) to find the total earnings available to common shareholders.
5. Add the preferred dividends back to the total earnings available to common shareholders to find the Net Income: \( \text{Net Income} = (1.25 \times 40,000) + 10,000 \).