Chapter 11, Problem 5PSB

1.

To determine

To compute: Market value of share.

Explanation of Solution

Formula for market value of share:

$\text{Market}\text{value}\text{of}\text{common}\text{stock}=\left(\begin{array}{l}\text{Total}\text{number}\text{of}\text{shares}\\ \times \text{Market}\text{price}\text{of}\text{share}\end{array}\right)$

Given,
Total number of shares is 18,000.
Market price of share is $90.

Substitute, 18,000 for total number of shares and $90 for market price of share in the above formula,

$\begin{array}{c}\text{Market}\text{value}\text{of}\text{common}\text{stock}=18,000\times \$90\\ =\$1,620,000\end{array}$

Hence, the market value of common stock is $1,620,000.

2.

To determine

To compute: Par value of common stock and preferred stock.

Explanation of Solution

Formula for par value of stock:

$\text{Par}\text{value}\text{of}\text{stock}=\frac{\text{Stock}}{\text{Number}\text{of}\text{outstanding}\text{shares}}$

Common stock:

Given,
Common stock is $900,000.
Number of outstanding shares is 18,000.

Substitute, $900,000 for common stock and 18,000 for number of outstanding shares in the above formula,

$\begin{array}{c}\text{Par}\text{value}\text{of}\text{common}\text{stock}=\frac{\$900,000}{18,000}\\ =\$50\end{array}$

Hence, the par value of common stock is $50.

Preferred stock:

Given,
Preferred stock is $375,000.
Number of outstanding shares is 1,500.

Substitute, $80,000 for preferred stock and 1,000 for number of outstanding shares in the above formula,

$\begin{array}{c}\text{Par}\text{value}\text{of}\text{preferred}\text{stock}=\frac{\$375,000}{1,500}\\ =\$250\end{array}$

Hence, the par value of preferred stock is $250.

3.

To determine

To compute: Book value of common stock with no arrears.

Explanation of Solution

Formula for book value of common stock:

$\text{Book}\text{value}\text{per}\text{share}=\frac{\text{Stockholders'}\text{equity}-\text{Preferred}\text{stock}}{\text{Number}\text{of}\text{common}\text{shares}}$

Given,
Stockholder’s equity is $2,400,000.
Preferred stock is $375,000.
Number of common shares is 18,000.

Substitute, $2,400,000 for stockholder’s equity,$375,000 for preferred stock and 18,000 for number of common share in the above formula,

$\begin{array}{c}\text{Book}\text{value}\text{par}\text{share}=\frac{\$2,400,000-\$375,000}{18,000}\\ =\$112.5\end{array}$

Hence, the market value of common stock is $112.50.

4.

To determine

To compute: Book value of common stock with arrears.

Explanation of Solution

Formula for book value of common stock:

$\text{Book}\text{value}\text{per}\text{share}=\frac{\text{Stockholders'}\text{equity}-\text{Preferred}\text{stock}}{\text{Number}\text{of}\text{common}\text{shares}}$

Given,
Stockholder’s equity is $2,340,000.
Preferred stock is $375,000.
Number of common shares is 18,000.

Substitute, $2,34,000 for stockholder’s equity,$375,000 for preferred stock and 18,000 for number of common share in the above formula,

$\begin{array}{c}\text{Book}\text{value}\text{par}\text{share}=\frac{\$2,340,000-\$375,000}{4,000}\\ =\$109.17\end{array}$

Hence, the market value of common stock is $109.17.

Working Notes:

Calculation for stockholder’s equity:

$\begin{array}{c}\text{Total}\text{Stockholder's}\text{equity}=\text{Stockholder's}\text{equity}-\text{Preferred}\text{dividend}\\ =\$2,400,000-\$60,000\\ =\$2,340,000\end{array}$

$\begin{array}{c}\text{Preferred}\text{dividend}=\text{Preferred}\text{stock}\times \text{Rate}\text{of}\text{interest}\times \text{Number}\text{of}\text{years}\\ =\$375,000\times \frac{8}{100}\times 2\\ =\$60,000\end{array}$

5.

To determine

To compute: Dividend paid to preferred and common shareholders and dividend per share for common stock.

Explanation of Solution

Preferred dividend

Formula for preferred dividend:

$\text{Preferred}\text{dividend}=\text{Preferred}\text{stock}\times \text{Rate}\text{of}\text{interest}\times \text{Number}\text{of}\text{years}$

Given,
Preferred stock is $375,000.
Rate of interest is 8%.
Number of years is 3.

Substitute, $375,000 for preferred stock, 8% for rate of interest and 3 for number of years in the above formula,

$\begin{array}{c}\text{Preferred}\text{dividend}=\$375,000\times \frac{8}{100}\times 3\\ =\$90,000\end{array}$

Hence, the preferred dividend is $90,000.

Common stock dividend:

Formula for common stock dividend:

$\text{Common}\text{stock}\text{dividend}=\text{Total}\text{dividend}-\text{Preferred}\text{dividend}$

Given,
Preferred dividend is $90,000.
Total dividend is $100,000.

Substitute, $90,000 for preferred dividend and $100,000 for total dividend in the above formula,

$\begin{array}{c}\text{Common}\text{stock}\text{dividend}=\$100,000-\$90,000\\ =\$10,000\end{array}$

Hence, the common stock dividend is $90,000.

Formula for dividend per share:

$\text{Dividend}\text{per}\text{share}=\frac{\text{Total}\text{dividend}}{\text{Number}\text{of}\text{outstanding}\text{shares}}$

Given,
Total dividend is $10,000.
Number of outstanding shares is 18,000.

Substitute, $10,000 for total dividend and 18,000 for number of outstanding shares in the above formula,

$\begin{array}{c}\text{Dividend}\text{per}\text{share}=\frac{\$10,000}{18,000}\\ =\$0.56\end{array}$

Hence, the market value of common stock is $0.56.

6.

To determine

To explain: Reasons for the difference between market and book value of share.

Explanation of Solution

Reasons for the difference between market and book value are:

• Assets and liabilities are recorded at historical cost and not on market value.
• Book value show the price of share according to the books of the company but market value is determined by the demand or supply of that particular stock.

Hence, the reason is demand and supply and historical concept followed for accounting.