What is the formula for Basic Earnings Per Share (EPS)?

• A. Net income / weighted-average shares
• B. Net income + preferred dividends / weighted-average shares
• C. (Net income − preferred dividends) × weighted-average shares
• D. (Net income − preferred dividends) / weighted-average shares

Answer: (D)

Basic earnings per share shows how much profit is attributable to each share of common stock after paying any preferred dividends. To get the amount available to common shareholders, you subtract preferred dividends from net income and then divide by the weighted-average number of common shares outstanding during the period. So the formula is (net income − preferred dividends) divided by weighted-average shares.

This correct approach matters because preferred dividends must be covered before common shareholders can claim earnings, and using the weighted-average number of shares accounts for fluctuations in shares outstanding during the period. The other options don’t fit: adding preferred dividends increases the numerator incorrectly, multiplying by shares multiplies instead of dividing, and using net income without subtracting preferred dividends overstates the amount available to common shareholders.