Earnings per Share Formula

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The correct formula for calculating earnings per share (EPS) is option D, EPS = ROE * Book value per share.

Earnings per share (EPS) is a financial metric that measures the profitability of a company on a per-share basis. It is a crucial metric for investors as it helps them understand how much profit a company is generating per share of stock. Higher EPS usually indicates better financial performance and higher potential returns for investors.

The formula for calculating EPS is as follows:

EPS = Net Income / Weighted Average Number of Shares Outstanding

Here, net income refers to the total earnings of the company after deducting all expenses, taxes, and other costs. Weighted average number of shares outstanding refers to the total number of shares issued by the company, including those held by insiders, employees, and institutional investors.

Option D, EPS = ROE * Book value per share, is a simplified version of the EPS formula. Here, ROE (Return on Equity) refers to the company's net income divided by its shareholders' equity. Shareholders' equity is the difference between a company's total assets and its total liabilities.

Book value per share refers to the total shareholder equity divided by the number of outstanding shares. It represents the theoretical value of each share if the company were to be liquidated and all its assets were sold.

By multiplying ROE with book value per share, we can calculate the earnings per share of a company. This formula assumes that the company has no preferred stock and does not factor in the effects of dilution from stock options, warrants, or convertible securities.

Option A, EPS = IRR / Market value per share, is not a correct formula for calculating EPS. IRR (Internal Rate of Return) is a measure of a company's profitability, and market value per share is the current market price of a share of stock. While both of these metrics are important for investors, they are not used in calculating EPS.

Option B, EPS = ROE * Net asset value per share, is also not a correct formula for calculating EPS. Net asset value per share is calculated by subtracting the company's liabilities from its assets and dividing the result by the number of outstanding shares. This metric does not factor in the company's profitability or earnings.

Option C, EPS = NPV * Retained earning value per share, is also not a correct formula for calculating EPS. NPV (Net Present Value) is a measure of the value of future cash flows, while retained earnings refer to the portion of a company's earnings that are kept after dividends are paid to shareholders. These metrics are not used in calculating EPS.