Chapter 11, Problem 5PSA

1.

Summary Introduction

Introduction:Common stock refers to the securities of a company issued to public to generate capital for the company. Holder of these securities are called stockholders. The market value of common stock is calculated by multiplying the current market price per share of common stock with the total number of outstanding shares.

To calculate:The current market value of the corporation’s common stock.

Explanation of Solution

The current market value of the corporation’s common stock is $85.

2.

Summary Introduction

Introduction:Common stock& preferred stock refers to the securities of a company issued to public to generate capital for the company. Par value of preferred stock & common stock refers to the value of securities stated in the legal documents of the company.

To calculate:The par value of corporation’s preferred stock & common stock.

Explanation of Solution

Preferred stock value: $50,000

Number of preference shares: 1,000

The par value of preferred stock:

  $\begin{array}{c}\text{Par}\text{value}=\frac{\text{value}\text{of}\text{preferred}\text{stock}}{\text{number}\text{of}\text{preferred}\text{stock}}\\ =\frac{\$50,000}{1,000}\\ =\$50\text{per}\text{share}\end{array}$

Common stock value: $80,000

Number of common stocks: 4,000

The par value of common stock:

  $\begin{array}{c}\text{Par}\text{value}=\frac{\text{value}\text{of}\text{common}\text{stock}}{\text{number}\text{of}\text{common}\text{stock}}\\ =\frac{\$80,000}{4,000}\\ =\$20\text{per}\text{share}\end{array}$

3.

Summary Introduction

Introduction:Common stock & preferred stock refers to the securities of a company issued to public to generate capital for the company. Book value of securities is calculated by dividing the value of securities in the books by the total number of outstanding securities.

To calculate:The book value of preferred stock and common stock if there is no arrear of dividends.

Explanation of Solution

Preferred stock value: $50,000

Number of preference shares: 1,000

The book value of preferred stock:

  $\begin{array}{c}\text{Book}\text{value}=\frac{\text{value}\text{of}\text{preferred}\text{stock}}{\text{number}\text{of}\text{preferred}\text{stock}}\\ =\frac{\$50,000}{1,000}\\ =\$50\text{per}\text{share}\end{array}$

Common stock value: $80,000

Retained earnings: $150,000

Number of common stocks: 4,000

The book value of common stock:

  $\begin{array}{c}\text{Book}\text{value}=\frac{\text{value}\text{of}\text{common}\text{stock}+\text{retained}\text{earnings}}{\text{number}\text{of}\text{common}\text{stock}}\\ =\frac{\$80,000+\$150,000}{4,000}\\ =\frac{\$230,000}{4,000}\\ =\$57.5\text{per}\text{share}\end{array}$

4.

Summary Introduction

Introduction:Common stock & preferred stock refers to the securities of a company issued to public to generate capital for the company. Book value of securities is calculated by dividing the value of securities in the books by the total number of outstanding securities.

To calculate:The book value of preferred stock and common stock if there is two years arrear of dividends.

Explanation of Solution

Dividend for two years: (($50,000×5%) ×2) = $5,000

Preferred stock value: $50,000 + $5,000 = $55,000

Number of preference shares: 1,000

The book value of preferred stock:

  $\begin{array}{c}\text{Book}\text{value}=\frac{\text{value}\text{of}\text{preferred}\text{stock}}{\text{number}\text{of}\text{preferred}\text{stock}}\\ =\frac{\$55,000}{1,000}\\ =\$55\text{per}\text{share}\end{array}$

Common stock value: $80,000

Retained earnings: $150,000

Dividend for two years: (($50,000×5%) ×2) = $5,000

Balance of retained earnings: $150,000 - $5,000 = $145,000

Number of common stocks: 4,000

The book value of common stock:

  $\begin{array}{c}\text{Book}\text{value}=\frac{\text{value}\text{of}\text{common}\text{stock}+\text{balance}\text{of}\text{retained}\text{earnings}}{\text{number}\text{of}\text{common}\text{stock}}\\ =\frac{\$80,000+\$145,000}{4,000}\\ =\frac{\$225,000}{4,000}\\ =\$56.25\text{per}\text{share}\end{array}$

5.

Summary Introduction

Introduction:Common stock & preferred stock refers to the securities of a company issued to public to generate capital for the company. Book value of securities is calculated by dividing the value of securities in the books by the total number of outstanding securities.

To calculate:The book value of preferred stock and common stock if there is two years arrear of dividends and preferred stock is callable at $55 per share.

Explanation of Solution

Callable price of preferred stock: $55 per share

Therefore, book value of preferred stock: $55

Common stock value:

Particular	Amount ($)
Total stockholders’ equity	280,000
Less: Value of preferred stock ($55×1,000)	55,000
Less: two years dividend (($50,000×5%) ×2)	5,000
Value of common stock	220,000

Book value of common stock:

  $\begin{array}{c}\text{Book}\text{value}=\frac{\text{value}\text{of}\text{common}\text{stock}}{\text{number}\text{of}\text{common}\text{stock}}\\ =\frac{\$220,000}{4,000}\\ =\$55\text{per}\text{share}\end{array}$

6.

Summary Introduction

Introduction:The owners of the securities of the company are called the stockholders. They receive an amount of money on their shareholding in the company. This amount is called as dividend.

To calculate:The amount of dividend per share to common stock if a dividend of $11,500 is declared by the board of director.

Explanation of Solution

Dividend for two years: (($50,000×5%) ×2) = $5,000

Dividend for current year: ($50,000×5%) = $2,500

Total dividend: $5,000 + $2,500 = $7,500

Dividend declared by board: $11,500

Amount payable to preferred stock: $7,500

Amount payable to common stock: $11,500 - $7,500 = $4,000

Amount of dividend payable to common stock:

  $\begin{array}{c}\text{Dividend}\text{per}\text{share}=\frac{\text{amount}\text{payable}\text{to}\text{common}\text{stock}}{\text{number}\text{of}\text{common}\text{stock}}\\ =\frac{\$4,000}{4,000}\\ =\$1\text{per}\text{share}\end{array}$

7.

Summary Introduction

Introduction:Book value of securities is calculated by dividing the value of securities in the books by the total number of outstanding securities.The market value of common stock is calculated by multiplying the current market price per share of common stock with the total number of outstanding shares.

To describe:The factors which contribute to the difference in the book value of common stock and the market value of common stock.

Explanation of Solution

Thefactors which contributes to the difference in the book value of common stock & its market value is as follows:

• The book value does not reflect true resale value of the assets of the company:

The books show the assets at its purchased value. It does not show the current market price of the assets. Therefore, the assets in the books may shown at higher value than its actual value in the market. This makes the value of common stock less in market than the value shown in the books.

• Company’s future cash inflows are more valuable than its book value:

The books show the assets at its purchased value. Book value of common stock is reflected by deducting the value of liabilities from the assets of the company.

The market value of common stock depends on the profits earned by the company. The company may have more future cash inflows which increases the market value of the common stock of the company.

These factors make a difference in the book value & market value of the common stock of the company.