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Question:
The equity section of Cyril Corporation's balance sheet shows the following:

Preferred stock: 4% cumulative, $25 par value, $30 call price, 10,000 shares issued and outstanding $250,000
Common stock: $10 par value, 35,000 shares issued and outstanding 350,000
Retained earnings 267,500
Total stockholders' equity $867,500
Determine the book value per share of the preferred and common stock under two separate situations:

1. No preferred dividends are in arrears.
2. Three years of preferred dividends are in arrears.

Respuesta :

zainsubhani

Answer:

Part 1:

[tex]Book\ value\ per\ share\ of\ the\ preferred=\$25[/tex]

[tex]Book\ value\ per\ share\ of\ the\ common\ stock=\$17.6428[/tex]

Part 2:

[tex]Book\ value\ per\ share\ of\ the\ preferred=\$28[/tex]

[tex]Book\ value\ per\ share\ of\ the\ common\ stock=\$16.7857[/tex]

Explanation:

Part 1: (the book value per share of the preferred and common stock under No preferred dividends are in arrears)

Book value per share of the preferred :

[tex]Book\ value\ per\ share\ of\ the\ preferred=\frac{(Preferred\ Stock+Cumulative\ dividends)}{Number\ of\ shares\ of\ preferred\ stock}[/tex]

In our case Cumulative dividends=0

[tex]Book\ value\ per\ share\ of\ the\ preferred=\frac{\$250000+0}{10000} \\Book\ value\ per\ share\ of\ the\ preferred=\$25[/tex]

Book value per share of the common stock:[tex]Book\ value\ per\ share\ ofthecommonstock=\frac{Stockholder\ equity-Preferred\ Stock-Cumulative\ dividends}{Number\ of\ shares\ of\ preferred\ stock}[/tex]In our case Cumulative dividends=0

[tex]Book\ value\ per\ share\ of\ the\ common\ stock=\frac{\$867500-\$250000-\$0}{35000} \\Book\ value\ per\ share\ of\ the\ common\ stock=\$17.6428[/tex]

Part 2:

Annual Preferred Dividend=4%*$25*10,000=$10,000

Three years of preferred dividends are in arrears= 3*Annual Preferred Dividend

Three years of preferred dividends are in arrears= 3*$10000=$30,000

Formula for  the book value per share of the preferred is same as above,so we will direct calculate:

In our case Cumulative dividends=$30,000

Book value per share of the preferred :

[tex]Book\ value\ per\ share\ of\ the\ preferred=\frac{\$250000+\$30000}{10000} \\Book\ value\ per\ share\ of\ the\ preferred=\$28[/tex]

Book value per share of the common stock:

Formula for  the book value per share of the common stock is same as above,so we will direct calculate:

[tex]Book\ value\ per\ share\ of\ the\ common\ stock=\frac{\$867500-\$250000-\$30000}{35000} \\Book\ value\ per\ share\ of\ the\ common\ stock=\$16.7857[/tex]

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