alleryStart learning →Earnings per share tells an investor what?
AThe cash actually handed to each stockholder
BThe dollars earned by each share of stock
CThe market price paid for each share of stock
DThe dividend promised on each share of stock
Answer & Solution
Correct answer: B. The dollars earned by each share of stock
1. Earnings per share is the ratio of net profit to the number of shares of common stock outstanding.
2. It measures the number of dollars earned by each share of stock.
3. It is the amount earned by each share, not the amount actually given to stockholders as dividends.
4. Some earnings may be put back into the firm instead of paid out, which is exactly why the two figures differ.
5. Earnings per share is watched closely by investors and also indicates a firm's ability to pay dividends.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.7 Analyzing Financial Statements_
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