1.
Indicate the market value of common stock of Company S.
1.
Explanation of Solution
Market value: Market value is the price at which, both seller and buyer agree to exchange the security. So, market value is the selling price to the seller and the purchase price for the buyer.
The market value of common stock of Company S is $90.
2.
Indicate the par values of common stock and preferred stock of Company S.
2.
Explanation of Solution
Par value: The corporation charter assigns and allocates the dollar value for its share which is referred to as par value.
The par value of preferred stock of Company S is
The par value of common stock of Company S is
3.
Compute the book value per share of Company S’s preferred stock and common stock, if no dividends are in arrears.
3.
Explanation of Solution
Book value per share: This is a financial ratio which measures the value of shareholders’ equity available per common share.
Formula for book value per common share:
Compute the book value per share of preferred stock of Company S.
Particulars | Amount ($) |
Preferred stock value | $375,000 |
Number of outstanding | ÷ 1,500 |
Book value per preferred share | $250 |
Table (1)
Compute the book value per share of common stock of Company S.
Particulars | Amount ($) | Amount ($) |
Total stockholders’ equity | $2,400,000 | |
Less: Equity applicable to preferred shares | 375,000 | |
Equity applicable to common shares | $2,025,000 | |
Divide: Number of outstanding common shares | ÷ 18,000 | |
Book value per common share | $112.50 |
Table (2)
Thus, the book value per share of Company S’s preferred stock and common stock is $250 and $112.50 respectively, if no dividends are in arrears.
4.
Compute the book value per share of Company S’s preferred stock and common stock, if two year preferred dividends are in arrears.
4.
Explanation of Solution
Compute the book value per share of preferred stock of Company S.
Particulars | Amount ($) | Amount ($) |
Preferred stock par value | $ 375,000 | |
Add: Two years’ dividends in arrears | $60,000 | |
Preferred equity | $ 435,000 | |
Divide: Number of outstanding preferred shares | ÷ 1,500 | |
Book value per preferred share | $290.00 |
Table (3)
Compute the book value per share of common stock of Company S.
Particulars | Amount ($) | Amount ($) |
Total stockholders’ equity | $2,400,000 | |
Less: Equity applicable to preferred shares | 375,000 | |
Less: Preferred dividend (1) | 60,000 | |
Equity applicable to common shares | $1,965,000 | |
Number of outstanding common shares | ÷ 18,000 | |
Book value per common share | $109.17 |
Table (4)
Working Note:
Compute the amount of preferred dividends for 2 years.
Thus, the book value per share of Corporation’s preferred stock and common stock is $290 and $109.17 respectively, if two year preferred dividends are in arrears.
5.
Compute the book value per share of Company S’s preferred stock and common stock, if two year preferred dividends are in arrears and the preferred stock is callable at $280 per share.
5.
Explanation of Solution
Compute the book value per share of preferred stock of Corporation R.
Particulars | Amount ($) | Amount ($) |
Preferred stock call price | $420,000 | |
Add: Two years’ dividends in arrears (2) | $60,000 | |
Preferred equity | $ 480,000 | |
Divide: Number of outstanding preferred shares | ÷ 1,500 | |
Book value per preferred share | $320.00 |
Table (5)
Compute the book value per share of common stock of Corporation R.
Particulars | Amount ($) | Amount ($) |
Total stockholders’ equity | $2,400,000 | |
Less: Equity applicable to preferred shares | ($480,000) | |
Equity applicable to common shares | $1,920,000 | |
Divide: Number of outstanding common shares | ÷ 18,000 | |
Book value per common share | $106.67 |
Table (6)
Working Note:
Compute the amount of preferred dividends for 2 years.
Thus, the book value per share of Company S’s preferred stock and common stock $320 and $106.67 respectively, if two year preferred dividends are in arrears and the preferred stock is callable at $280 per shares.
6.
Compute the total amount of dividend paid to the preferred and common stockholders, and dividend per share of common stock, if 2 years preferred dividends are in arrears and company declares cash dividend of $100,000.
6.
Explanation of Solution
Common stock: Common stock is the cash raised by the company by issuing common or ordinary shares to the stockholders. This is an investment for the shareholders for which they receive the dividends from the issuing company, and have voting rights.
Preferred stock: Preferred stock is the cash raised by the company by issuing preferred shares. This investment fetches a preferential right for dividend for the preferred stockholders over the common stockholders.
Cash dividends: This is the amount of cash distributed to stockholders by a company out its earnings, according to their proportion of shares invested in the company.
Compute the dividend per share of common stock.
Particulars | Amount ($) |
Cumulative preferred dividend of current year | $30,000 |
Two year dividend in arrears (1) | 60,000 |
Total cumulative preferred dividend paid | $90,000 |
Total dividends declared | $100,000 |
Less: Cumulative preferred dividend paid | (90,000) |
Common dividend paid | $10,000 |
Number of common outstanding shares | ÷ 18,000 shares |
Common dividend per share | $0.56 |
Table (7)
Note: Refer to Equation (1) for the value and computation of preferred dividend for two years.
Thus, the total amount of dividend paid to the preferred and common stockholders is $90,000 and $10,000 respectively, and the dividend per share of common stock is $0.56.
7.
Explain the reasons for which the book value not being a good estimate of its market value of the common stock.
7.
Explanation of Solution
Reasons: The main reason for book value not being a good estimate for market price is the recording of assets at historical cost, but not the current selling price. So, book value and market value are different. Book value depends on the past transactions but current market value depends on company’s growth, earnings, market interest rate, and government policies.
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Chapter 13 Solutions
Principles of Financial Accounting.
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