Final answer:
The book value per common share is calculated by subtracting the preferred equity from total shareholders' equity and then dividing by the number of common shares outstanding. This isolates the equity that can be attributed to common shareholders and provides the book value per share.
Step-by-step explanation:
When a company has both common shares and preferred shares, the book value per common share is calculated by dividing total shareholders' equity less preferred equity by the number of common shares outstanding. This is because preferred shares have priority over common shares in terms of dividends and liquidation proceeds, and they typically have a fixed book value. To calculate the book value per common share, you must subtract the value of preferred equity from the total shareholders' equity to isolate the equity belonging to common shareholders. After that, divide this adjusted equity value by the number of common shares outstanding to find the book value per common share.
For example, if a company has a total shareholders' equity of $100 million and preferred equity of $20 million, with 2 million common shares outstanding, you would calculate the book value per common share as follows:
- Subtract preferred equity from total equity: $100 million - $20 million = $80 million
- Divide by the number of common shares outstanding: $80 million / 2 million shares = $40 per share
The correct option in this case is 'b) dividing total shareholders' equity less preferred equity by the number of common shares outstanding'.