Numerator (Basic EPS): Net income = $650,000; Preferred dividends = $40,000 [(10% x $100) x 4,000]. Because the preferred stock is cumulative, dividends are included whether or not paid
Denominator (Basic EPS): Weighted average # shares common stock outstanding
1/1 – 12/31 440,000 x (12/12) = 440,000
10/1 – 12/31 16,000 x (3/12) = 4,000
Weighted average # shares 444,000
Basic EPS = ($650,000 - $40,000) ÷ 444,000 = $1.37
