Answer :
Final answer:
The correct answer is 4) after taxes minus preferred dividends. Earnings available for common stockholders are calculated as net profits after taxes minus preferred dividends. These are the funds that can be distributed to common stockholders or reinvested into the company as retained earnings.
Explanation:
The correct answer is 4) after taxes minus preferred dividends. The question relates to the calculation of earnings available for common stockholders. These earnings are calculated as net profits after all expenses have been paid, including taxes. From this number, any dividends that are to be paid to preferred shareholders are subtracted because these dividends take priority over any distributions to common stockholders. Therefore, the correct answer is that earnings available for common stockholders are calculated as net profits after taxes minus preferred dividends.
Dividends are payments made to shareholders from the company's after-tax profits. If not distributed as dividends, these profits can become retained earnings, which are reinvested back into the company. Shareholders might gain from such reinvestment in the form of increased stock value and future profits. Alternatively, stockholders can benefit from capital gains, which occur when they sell their shares for more than they paid.
