In: Accounting
Nash Inc. began operations in January 2015 and reported the following results for each of its 3 years of operations.
2015 $ 260,000 net loss
2016 $ 37,000 net loss
2017 $ 819,000 net income
At December 31, 2017, Nash Inc. capital accounts were as follows.
7% cumulative preferred stock, par value $100; authorized, issued, and outstanding 4,700 shares $ 470,000 Common stock, par value $1.00; authorized 1,000,000 shares; issued and outstanding 818,000 shares $ 818,000 Nash Inc. has never paid a cash or stock dividend. There has been no change in the capital accounts since Nash began operations. The state law permits dividends only from retained earnings.
(a) Compute the book value of the common stock at December 31, 2017.
(b) Compute the book value of the common stock at
December 31, 2017, assuming that the preferred stock has a
liquidating value of $ 108 per share.
Retained earnings balance | Amount (in$) |
2015 | -260000 |
2016 | -37000 |
2017 | 819000 |
522000 | |
Less: preferred dividend | -98700 |
Available to common stock holders | 423300 |
(A.) Compute the book value of the common stock at December 31, 2017
Preferred stock | $470000 |
Common stock | $818000 |
Retained earnings | |
Preferred dividend for 3 years (470000*7%*3) | $98700 |
Dividend to common stock holders | $423300 |
a. | Balance in common stock | $1241300 |
b. | Number of common stock shares outstanding | $818000 |
Book value of per common stock share (a/b) | $1.517 |
B.
Retained earnings balance | Amount (in$) |
2015 | -260000 |
2016 | -37000 |
2017 | 819000 |
522000 | |
Less: liquid premium to preferred stock (4700*8) | 37600 |
484400 | |
Preferred dividend | 98700 |
Available to common stock holders | 385700 |
(B.) Compute the book value of the common stock at December 31, 2017
assuming the preferred stock has liquidating value of $108
Preferred stock | $470000 |
Common stock | $818000 |
Retained earnings | |
Preferred dividend for 3 years (470000*7%*3) | $98700 |
Dividend to common stock holders | $385700 |
a. | Balance in common stock (818000+385700) | $1203700 |
b. | Number of common stock shares outstanding | $818000 |
Book value of per common stock share (a/b) | $1.471 |