The Earnings Per Share Figure Are Likely to Be of Interest

question 16

Multiple Choice

The earnings per share figure are likely to be of interest to shareholders and potential investors because:

• A) It calculates the relationship between the share price and the earnings of the entity so that it reflects the market's evaluation of the quality of earnings of the entity.
• B) It may be a useful predictor of share price to the extent that earnings are linked to future cash flows and the market reacts to unexpected changes in earnings.
• C) The relationship between dividends and earnings provides a useful prediction of the likely future cash flows to shareholders from their investment in the entity.
• D) It calculates the return on the capital invested by each shareholder for the period and so is a key benchmark for evaluating the success of the entity.
• E) None of the given answers.

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Definitions:

Coefficient Of Determination

A measure of the goodness of fit of the estimated regression equation. It can be interpreted as the proportion of the variability in the dependent variable y that is explained by the estimated regression equation.

Correlation Coefficient

A measure of the strength of the linear relationship between two variables.

Squared Residual

The square of the difference between an observed value and the value predicted by a model, used in regression analysis to measure error.

Mean Square Error

The unbiased estimate of the variance of the error term s2. It is denoted by MSE or s2.