What is the logic behind not including preference dividend in calculation of EPS?
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The preference dividend is a type of dividend that is paid to preferred stockholders before any dividend is paid to common stockholders. The logic behind not including preference dividends in the calculation of earnings per share (EPS) is that the preferred stockholders have a priority claim on the company’s earnings, and their dividends are fixed and predetermined.
In other words, the preferred stockholders are entitled to receive their dividends regardless of how well the company performs in a given period. Since EPS is calculated by dividing the earnings available to common stockholders by the weighted average number of common shares outstanding during the period, the preferred dividends are not factored into the calculation. This is because the preferred dividends are not available to be distributed to common stockholders.
However, it is important to note that the preferred dividends are still a significant expense for the company, and they must be paid before any dividend is paid to common stockholders. As a result, the payment of preferred dividends can affect the company’s overall profitability and cash flow, and it is an important consideration for investors when evaluating a company’s financial performance.
If in question PAT, No. of shares and Pref Dividend are given then
EPS= PAT- Pref Dividend/ No. of shares
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Yes it is correct.