Solve by drawing the area model using the standard algorithm
a. 7,481 x 290

The EPS is approximately:

it can be any of them:

if preferred dividends = $4,800,000, then EPS = $0.40 (option A)

if preferred dividends = $720,000, then EPS = $1.76 (option B)

if preferred dividends = $0, then EPS = $2 (option D)

EPS = (net income - preferred dividends) / outstanding shares = ($6,000,000 - preferred dividends) / 3,000,000 shares

The Price/Earnings ratio is approximately:

if EPS = $0.40, then PE ratio = 12.5 (option D)

if EPS = $1.76, then PE ratio = 2.84 (option C)

if EPS = $2, then PE ratio = 2.5 (option B)

Price/earnings (PE) ratio = share price / EPS = $5 / EPS

EPS cannot be $1.80, since PE ratio = 2.78 and that is not an option.

Some companies have a higher share price for the same level of earnings. Why?

Some stocks like Amazon have a very low EPS, form any years its EPS was very low bu its stock price kept rising. The stock price is based mostly on potential future earnings, not current earnings. A company that is being liquidated might have a high EPS, but a very low stock price since it will stop operating soon.  

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