1. Tan Ti Fen Cui Dong Yao Lim Ming Hui Melissa Tan MB101 AccountingTutorial 4: Question 4
2. Lecture 4: Stockholdersâ Equlity [Preferred and Common Stock] Tutorial 4 : Question 4 Rachael Corporationâs common stock is currently selling on stock exchange at $85 per share, and its current balance sheet shows the following stockholdersâ equity section
11. Lecture 4: Stockholdersâ Equlity [Calculating Book value] Question (4b) If no dividend are in arrears, what is the book value per share of common stock?
12.
13. Lecture 4: Stockholdersâ Equity [Calculating Book value: Quick Refresh!] 4b) If no dividend are in arrears, what is the book value per shareof common stock? THE FORMULA : Deriving Total stockholders equity: Inclusive of : Common Stock Inclusive of :Preferred Stock and Preferred dividends in arrears) Inclusive of: Retained Earnings
14. Lecture 4: Stockholdersâ Equlity [Calculating Book value: Answer for 1b] If no dividend are in arrears, what is the book value per share of common stock? Answer: Total book value of common stock = (total stockholdersâ equity) - (preferred stock) = $280,000 - $50,000 = $230,000 Book value per share of common stock = (total book value of common stock) / (no. of shares issued and outstanding) = $230,000 / 4,000 = $ 57.50
15. Lecture 4: Stockholdersâ Equlity [Calculating book value per share with Cumulative preferred dividend] Question (4C) c) If 2 yearsâ preferred dividend are in arrears, what is the book value per share of common stock?
16.
17. The total amount owed to preferred stockholders must be paid first.
18.
19. Lecture 4: Stockholdersâ Equlity [Calculating book value per share with Cumulative preferred dividend] ContinueâŠ.c) If 2 yearsâ preferred dividend are inarrears, what is the book value per share of common stock?Answer: Book value per share of common stock = (Total book value of common stock)/ (No. of shares issued and outstanding) = $222,500 / 4,000 = $ 55.63 (nearest cent) This calculation procedure reflects the fact that the common stockholders are the residual owners of the corporate entity.
20. Lecture 4: Stockholdersâ Equlity [Allocation of Dividends between Preferred and Common stock] 4d) Part 1) If two yearsâ 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? Answering this question in 3 steps: Step 1: Preferred dividends in arrears (must pay, 5% cumulative) Step 2: Current year preferred dividends (paid before common dividends) Step 3: Current year common dividends Cash Dividends of $11,500
21. Lecture 4: Stockholdersâ Equlity [Allocation of Dividends between Preferred and Common stock] Step 1: Preferred dividends in arrears (must pay, 5% cumulative) Total amount of preferred stock: $50,000 Dividend rate: 5% Time: 2 years Preferred dividend= Principal x dividend rate x time Total amount of preferred dividends in arrears: $50,000 x 5% x 2=$5000
22. Lecture 4: Stockholdersâ Equity [Allocation of Dividends between Preferred and Common stock] Step 2: Current year preferred dividends (paid before common dividends) Total amount of preferred stock: $50,000 Dividend rate: 5% Time: 1 year Current year amount of preferred dividends: $50,000 x 5% x 1=$2500 Total amount of preferred dividends: $5000 + $2500=$7500
23. Lecture 4: Stockholdersâ Equlity [Allocation of Dividends between Preferred and Common stock] Step 3: Current year common dividends Deriving Common stock dividends: Total Cash dividends - 3years of Cumulative Preferred dividends = Common dividends. $11,500-$5000-$2500=$4000
24. Lecture 4: Stockholdersâ Equlity [Allocation of Dividends between Preferred and Common stock] 4d)Part 2)What is the amount of dividends per share for the common stock? Amount of dividends per share = Total amount of common dividends Shares of common dividends = $4000/4000 =$1
25. Lecture 4: Stockholdersâ Equity [Debt and Equity financing] Question (4e) Identify two reasons a corporation may choose to issue cumulative preferred stock rather than finance operation with long term debt.
26. Lecture 4: Stockholdersâ Equity [Debt and Equity financing: Quick Refresh!] Debt vsEquity Has a maturity date Creditors of the business If business ceases, creditors must be paid in full Usually requires borrower to pay interest No maturity date Owners of the business If business ceases, stockholders might not get the full capital back Might receive dividend.