Question

Question:

Raphael Corporation’s common stock is currently selling on a stock exchange at \(85 per share, and its current balance sheet shows the following stockholders’ equity section:

Preferred stock—5% cumulative, \)___ par value, 1,000 shares

authorized, issued, and outstanding . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . \( 50,000

Common stock—\)___ par value, 4,000 shares authorized, issued,

and outstanding . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000

Retained earnings . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000

Total stockholders’ equity . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(280,000

Required

Required

1. What is the current market value (price) of this corporation’s common stock?

2. What are the par values of the corporation’s preferred stock and its common stock?

3. If no dividends are in arrears, what is the book value per share of common stock? (Round per share value to the nearest cent.)

4. If two years’ preferred dividends are in arrears, what is the book value per share of common stock? (Round per share value to the nearest cent.)

5. If two years’ preferred dividends are in arrears and the board of directors declares cash dividends of \)11,500, what total amount will be paid to the preferred and to the common shareholders?

What is the amount of dividends per share for the common stock? (Round per share value to the nearest cent.)

Analysis Component

6. What are some factors that can contribute to a difference between the book value of common stock and its market value (price)?

Short answer

Answer

1. $340,000
2. Par value of common and preferred stock is $20and $50.
3. Book value of common stock when no preference dividend is in arrear $57.50
4. Book value of common stock when preference dividend in arrear is $56.25.
5. Dividend Amount paid to common and preferred stock holders are $6,500and $5,000respectively. Dividend per share of common stock is $1.625.
6. Book value of common stock is not good estimate for market value as it depends on historical value while market value depends on future earnings and growth.

Step-by-step solution

current market value (price) of this corporation’s common stoc

Market value is the price at which corporation stock is selling i.,e $ 85.

$$\begin{gathered} \mathit{C}\mathit{u}\mathit{r}\mathit{r}\mathit{e}\mathit{n}\mathit{t}\mathbf{}\mathit{M}\mathit{a}\mathit{r}\mathit{k}\mathit{e}\mathit{t}\mathbf{}\mathit{V}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathbf{=}\mathit{N}\mathit{u}\mathit{m}\mathit{b}\mathit{e}\mathit{r}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{S}\mathit{t}\mathit{o}\mathit{c}\mathit{k}\mathbf{\times }\mathit{M}\mathit{a}\mathit{r}\mathit{k}\mathit{e}\mathit{t}\mathit{P}\mathit{r}\mathit{i}\mathit{c}\mathit{e} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{4}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{85} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{340}\mathbf{,}\mathbf{000} \end{gathered}$$

Par Value of Corporation stocks

$\begin{array}{rcl}\mathbf{}\mathbf{Preference}\mathbf{}\mathbf{}\mathbf{Stock}\mathbf{}\mathbf{}\mathbf{Par}\mathbf{}\mathbf{Value}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Amount}\mathbf{}\mathbf{Outstanding}}{\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Preference}\mathbf{}\mathbf{Stock}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \frac{\mathbf{\$}\mathbf{50}\mathbf{,}\mathbf{000}}{\mathbf{1}\mathbf{,}\mathbf{000}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{\$}\mathbf{50}\\ \mathbf{Common}\mathbf{}\mathbf{Stock}\mathbf{}\mathbf{Par}\mathbf{}\mathbf{Value}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Amount}\mathbf{}\mathbf{Outstanding}}{\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Common}\mathbf{}\mathbf{Stock}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \frac{\mathbf{\$}\mathbf{80}\mathbf{,}\mathbf{000}}{\mathbf{4}\mathbf{,}\mathbf{000}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{\$}\mathbf{20}\end{array}$

Book Value Per share when no arrears in Preferred dividend

	Amount
Total stockholders’ equity	$280,000
Less: Preferred stock—5% cumulative, $50 par value, 1,000 shares authorized, issued, and outstanding	50,000
Book value for common stockholder	230,000
Number of common stocks	4,000
Net Income (230,000/4000)	$ 57.50

Book Value Per share when 2 years arrears in Preferred dividend

	Amount
Total stockholders’ equity	$280,000
Less: Preferred stock—5% cumulative, $50 par value, 1,000 shares authorized, issued, and outstanding	50,000
Less Arrears in Preference dividend (50,000x5%x2Years)	5,000
Book value for common stockholder	225,000
Number of common stocks	4,000
Net Income (225,000/4000)	$ 56.25

Dividend Per share

	Preferred	Common
Cash dividend available (a)	$ 11,500
Less: Preferred Divided (50,000*5%) *2 (b)	(5,000)
Dividend available to common stock holders (a-b)		6,500
Number of shares		4,000
Dividend per common share (6500/4000)		1.625

 Step 6: Factors influences the book value of common stock and its market value (price)?

Market value of stock is based on the future earnings growth, dividend, industry and economic factors while the book value of common stock is function of the historical value of assets and liabilities therefore book value of common stock is not good estimate of for market value.