Nash Inc. began operations in January 2015 and reported the following results for each of its...

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.

Solutions

Expert Solution

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 (4700007%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

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 (4700007%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

ekkarill92 answered 1 month ago

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