Question

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.

Answer 1

Part 1:

`Book\ value\ per\ share\ of\ the\ preferred=\$25`

`Book\ value\ per\ share\ of\ the\ common\ stock=\$17.6428`

Part 2:

`Book\ value\ per\ share\ of\ the\ preferred=\$28`

`Book\ value\ per\ share\ of\ the\ common\ stock=\$16.7857`

Step-by-step 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 :

`Book\ value\ per\ share\ of\ the\ preferred=((Preferred\ Stock+Cumulative\ dividends))/(Number\ of\ shares\ of\ preferred\ stock)`

In our case Cumulative dividends=0

`Book\ value\ per\ share\ of\ the\ preferred=(\$250000+0)/(10000) \\Book\ value\ per\ share\ of\ the\ preferred=\$25`

Book value per share of the common stock:
`Book\ value\ per\ share\ ofthecommonstock=(Stockholder\ equity-Preferred\ Stock-Cumulative\ dividends)/(Number\ of\ shares\ of\ preferred\ stock)`In our case Cumulative dividends=0

`Book\ value\ per\ share\ of\ the\ common\ stock=(\$867500-\$250000-\$0)/(35000) \\Book\ value\ per\ share\ of\ the\ common\ stock=\$17.6428`

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 :

`Book\ value\ per\ share\ of\ the\ preferred=(\$250000+\$30000)/(10000) \\Book\ value\ per\ share\ of\ the\ preferred=\$28`

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:

`Book\ value\ per\ share\ of\ the\ common\ stock=(\$867500-\$250000-\$30000)/(35000) \\Book\ value\ per\ share\ of\ the\ common\ stock=\$16.7857`