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Chapter 11: Q16DQ (page 515)

How is book value per share computed for a corporation with no preferred stock? What is the main limitation of using book value pershare to value a corporation?

Short Answer

Expert verified

Book Value is Simply calculated by stockholders’ equity divided by Outstanding number of common stock.

The possible difference between the original value and market value of the assets and liabilities, is one of the main limitation.

Step by step solution

01

Step-1 Formula of Book Value Per Share

Book value per common share =Stockholders’ equity applicable to common shares

Outstanding Number of common shares

02

Step-2 Limitation  ofBook Value Per Share

The major limitation is related to the possible difference in the recording of original value and market value of the assets and liabilities. The difference between these values may result in wrong opinion.

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Most popular questions from this chapter

Assume that Tesla decides to launch a new website to market discount bookkeeping services to consumers. This chain, named Aladin, requires \(500,000 of start-up capital. The founder contributes \)375,000 of personal assets in return for 15,000 shares of common stock, but he must raise another \(125,000 in cash. There are two alternative plans for raising the additional cash.

• Plan A is to sell 3,750 shares of common stock to one or more investors for \)125,000 cash.

• Plan B is to sell 1,250 shares of cumulative preferred stock to one or more investors for \(125,000 cash

(this preferred stock would have a \)100 par value, an annual 8% dividend rate, and be issued at par).

1. If the new business is expected to earn $72,000 of after-tax net income in the first year, what rate of return on beginning equity will the founder earn under each alternative plan? Which plan will provide the higher expected return?

Foxburo Company expects to pay a \(2.34 per share cash dividend this year on its common stock. The current market value of Foxburo stock is \)32.50 per share. Compute the expected dividend yield on the Foxburo stock. Would you classify the Foxburo stock as a growth or an income stock? Explain

Compute the price-earnings ratio for each of these four separate companies. Which stock might an analyst likely investigate as being potentially undervalued by the market? Explain.

Company

Earningsper Share

Market Value Per Share

1

\( 12.00

\) 176.40

2

10.00

96.00

3

7.5

93.75

4

50

250.00

Question:

Kinkaid Co. is incorporated at the beginning of this year and engages in a number of transactions. The following journal entries impacted its stockholders’ equity during its first year of operations.

Account and explanation

Debit

Credit

A

Cash

Common Stock, \(25 Par Value

Paid-In Capital in Excess of Par Value, Common Stock

300,000

250,000

50,000

B

Organization Expenses

Common Stock, \)25 Par Value

Paid-In Capital in Excess of Par Value, Common Stock.

150,000

125,000

25,000

C

Cash

Accounts Receivable

Building

Notes Payable

Common Stock, \(25 Par Value

Paid-In Capital in Excess of Par Value, Common Stock

43,000

15,000

81,500

59,500

50,000

30,000

D

Cash

Common Stock, \)25 Par Value

Paid-In Capital in Excess of Par Value, Common Stock

120,000

75,000

45,000

Required

1. Explain the transaction(s) underlying each journal entry (a) through (d).

2. How many shares of common stock are outstanding at year-end?

3. What is the amount of minimum legal capital (based on par value) at year-end?

4. What is the total paid-in capital at year-end?

5. What is the book value per share of the common stock at year-end if total paid-in capital plus retained earnings equals $695,000?

Compute the dividend yield for each of these four separate companies. Which company’s stock would probably not be classified as an income stock? Explain

Company

Annual Cash

Dividend per Share

Market value Per Share

1

\( 16.06

\) 220.00

2

13.86

132.00

3

3.96

72.00

4

0.48

80.00
See all solutions

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