Answer (B) is correct . The EPS for Year 2 of $4.80 indicates a net income available to common shareholders of $4,800,000. Dividends on preferred stock would have been $200,000 ($2,000,000 ¡Á 10%). Thus, the net income must have been $5,000,000. A 10% increase for Year 3 would result in net income of $5,500,000. Only $100,000 ($1,000,000 ¡Á 10%) would be required for preferred dividends in Year 3, leaving $5,400,000 for common shareholders. After the 3-for-1 split, EPS would be $1.80 ($5,400,000 ¡Â 3,000,000 shares).<
Answer (A) is incorrect because Using Year 2 net income available to common shareholders increased by 10% for Year 3 instead of net income available to common shareholders for Year 3 results in $1.76.
Answer (C) is incorrect because Using Year 2 net income available to common shareholders increased by 10% for Year 3 instead of net income available to common shareholders for Year?3 results in $5.28. It also results from not increasing the number of common shares outstanding to allow for the stock split.
Answer (D) is incorrect because Not increasing the number of common shares outstanding to allow for the stock split results in $5.40.
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