The stockholders\' equity section of a company\'s year-end balance sheet is as f

Question

The stockholders' equity section of a company's year-end balance sheet is as
follows:
Preferred stock, $100 par value, 9%
cumulative and nonparticipating, 3,000
shares outstanding $300,000
Contributed capital in excess of
par value, preferred stock 60.000
Total capital contributed by preferred
stockholders $360,000
Common stock, $10 par value, 40,000 shares
outstanding $400,000
Contributed capital in excess of par value,
common stock 40,000
Total capital contributed by common
stockholders 440.000
Total contributed capital $800,000
Retained earnings 102.000
Total stockholders' equity $902.000

The preferred stock has a call price of $105 plus dividends in arrears (one year's
dividends are in arrears). Calculate the book value per common share. Show
your work in making this calculation.

Explanation / Answer

Book Value: Preferred Stock and Common Stock When a corporation has both common stock and preferred stock, the corporation's stockholders' equity must be divided between the preferred stock and the common stock. To arrive at the total book value of the common stock, compute the total book value of the preferred stock, and then subtract that amount from the total stockholders' equity. Preferred Stock's Book Value : The book value of one share of preferred stock is its call price plus any dividends in arrears. Here 9% cumulative preferred stock having a par value of $100 has a call price of $105, and the corporation owes a total of one years of dividends, the book value of this preferred stock is $105+9%*$100 = $114 per share. The total book value of the preferred stock is the book value per share times the total number of shares outstanding. Here book value per share of preferred is $114 and there are 3,000 shares of the preferred stock outstanding, then the total book value of the preferred stock is $342,000. Let's compute the total book value of preferred stock by using the following information: Stockholders' Equity Paid-in Capital 9% Prefstock, $100 par,3000 shares issued $300,000 Cont cap in excess of par value, pref stock $60,000 Comm stock, $10 par,40,000 shares outstanding $400,000 Paid-in capital in excess of par - common $40,000 The total book value for all of the preferred stock equals the book value per share of preferred stock times the number of shares of preferred stock outstanding, or $40,800 ($114 X 3000 = $342,000). Common Stock's Book Value: When a corporation has both common stock and preferred stock, the book value of the preferred stock is subtracted from the corporation's total stockholders' equity to arrive at the total book value of the common stock. Using the information above, we have: Corporation's total stockholders' equity $902,000 Less: Preferred stock's total book value –$342,000 Less: Cont cap in excess of par value, pref stock -$60,000 ------------------------------------------------------------------------- Common stock's total book value $500,000 Number of shares of common stock outstanding 40000 shares Common stock's book value per share $12.50 ................Ans

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