Claypool Manufacturing: Earnings per Share (EPS) Calculation

Earnings per Share (EPS) Calculation for Claypool Manufacturing

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Question

A financial analyst with Smith, Kleen, & Beetchnutty is examining shares of Claypool Manufacturing for possible investment. Assume the following information:

Sales: $50,000,000 -

Fixed costs: $33,000,000 -

Variable costs: $8,500,000 -

Interest expense: $900,000 -

Tax rate: 35%

Weighted Average Cost of Capital: 11.50%

Beta coefficient: 0.96 -

Common shares outstanding: 4,000,000

Using this information, what are the earnings per share (EPS) for Claypool Manufacturing?

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A. B. C. D. E. F.

E

The EPS figure is perhaps the single most popular term in the field of conventional equity investments, along with the Price-to-Earnings Ratio (P/E). Any glance into financial media and business periodicals will undoubtedly uncover numerous instances in which the EPS figure is cited or discussed. While quite popular and useful, most investors, and many business professionals, undoubtedly do not understand the mechanics behind the EPS calculation, and an investigation into the components of EPS is a valuable learning experience. The EPS calculation is found by the following equation:

{EPS = [(Sales - Fixed Costs - Variable Costs - Interest Expense)(1 - Tax Rate)] / [# of Common Shares Outstanding]}

Additionally, the EPS figure can be found by:

{EPS = [(EBIT - Interest Expense)(1 - Tax Rate) / # of Common Shares Outstanding]} Incorporating the given information into the first EPS equation will yield the following: {EPS = [($50,000,000 - $33,000,000 - $8,500,000 - $900,000)(1 - 0.35)] / 4,000,000} = $1.24.

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