Financial statement data for the years ended December 31 for Dovetail Corporation follow :

Particulars	20Y3	20Y2
Net income	$448,750	$376,000
Preferred Dividends	$40,000	$40,000
Average number of common shares outstanding	75,000 shares	60,000 shares

(a) Determine the earnings per share for 20Y3 and 20Y2

(b) Does the change in the earnings per share from 20Y2 to 20Y3 indicate a favorable or unfavorable trend ?

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Expert Solution

Earnings per share : Earnings per share is the amount of money earned per outstanding share of common stock during a certain time. This ratio is used to assess the profitability of the company's investors.

Following formula can be used to calculate earnings per share

Earnings per share = Net income (loss) - Preferred Dividends / Average no.of common shares outstanding

Calculation of earnings per share of Dovetail Corporation for the year ended December 31,20Y3 and 20Y2

Earnings per share for the year ended 20Y3 = Net income - Preferred Dividends / Average number of common shares outstanding

= $448,750 - $40,000 / 75,000

=$408,750 / 75,000

=$5.45 per share

Earnings per share for the year ended 20Y2 = Net income -preferred Dividends / Average number of common shares outstanding

=$5.60 per share

(a)As a result, Dovetail Corporation's earnings per share for the fiscal years ended 20Y3 and 20Y2 are $5.45 per share and $5.60 per share, respectively.

(b)Earnings per share for Dovetail Corporation fell from $5.60 to $5.45. This implies a downward tendency in its profitability.

balaji rao answered 1 year ago

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