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The question tells us that public companies in Clark's industry are trading at twelve times earnings. So first we need to calculate Clark's earnings per share, then multiply that by the earnings multiple of 12 to calculate the estimated value per share of Clark. To calculate EPS, we need to divide net income by the number of shares outstanding. This answer results from calculating EPS by subtracting dividends from net income and then dividing by the number of shares outstanding. The only dividends that should be subtracted from net income in calculating EPS are preferred dividends, and this company does not have any preferred stock. Common dividends belong to the common stockholders and they are included in earnings per share.
This is the par value of $1 per share multiplied by the earnings multiple of 12. "Earnings" refers to earnings per share. Earnings per share should be calculated, then multiplied by the earnings multiple of 12 to calculate the estimated value per share. Earnings per share is income available to common stockholders divided by the number of common shares outstanding.
The question tells us that public companies in Clark's industry are trading at twelve times earnings. So first we need to calculate Clark's earnings per share, then multiply that by the earnings multiple of 12 to calculate the estimated value per share of Clark. To calculate EPS, we need to divide net income by the number of shares outstanding. The amount of the dividend is irrelevant, because it is a dividend on common stock. Only dividends on preferred stock are subtracted from net income in calculating income available to common shareholders. Since this company does not have any preferred stock, the dividend is on common stock. The dividends paid to common stockholders are part of the income available to common stockholders, so they are not subtracted from net income. Par value is $1 per share, and common stock is $3,000,000. Therefore, there are 3,000,000 shares outstanding ($3,000,000 / $1).?? Net income of $3,750,000 divided by 3,000,000 shares outstanding equals EPS of $1.25 per share. Multiplying $1.25 per share by 12 gives us an estimated value per share of $15.00.
This is retained earnings divided by the number of shares outstanding and then multiplied by 12. "Earnings" means earnings per share. Earnings per share should be calculated, then multiplied by the earnings multiple of 12 to calculate the estimated value per share. Earnings per share is income available to common stockholders divided by the number of common shares outstanding. "Retained earnings" is the balance sheet account that accumulates net income in a permanent account. Retained earnings is not used in calculating earnings per share.