Question

Raphael Corporation’s common stock is currently selling on a stock exchange at $180 per share, and its current balance sheet shows the following stockholders’ equity section:

Preferred stock—5% cumulative, $___ par value, 1,000 shares authorized, issued, and outstanding	$	90,000
Common stock—$___ par value, 4,000 shares authorized, issued, and outstanding		160,000
Retained earnings		380,000
Total stockholders' equity	$	630,000
a.What is the current market value (price) of this corporation’s common stock? b.What are the par values of the corporation’s preferred stock and its common stock? c.If no dividends are in arrears, what is the book value per share of common stock? d.If two years’ preferred dividends are in arrears, what is the book value per share of common stock? e.If two years’ preferred dividends are in arrears and the board of directors declares cash dividends of $26,600, what total amount will be paid to the preferred and to the common shareholders? f.What is the amount of dividends per share for the common stock?

Answer 1

Solution a:

Current market value (price) of this corporation’s common stock = Nos of share outstanding * market price per share = 4000 * $180 = $720,000

Per share market value = $180 per share

Solution b:

Par value of preferred stock = $90,000 / 1000 = $90 per share

Par value of common stock = $160,000 / 4000 = $40 per share

Solution c:

If no dividends are in arrears, book value per share of common stock = (Common stock + Retained earnings) / Nos of shares outstanding = ($160,000 + $380,000) / 4000 = $135 per share

Solution d:

If two years’ preferred dividends are in arrears, then retained earning available for common shareholders = $380,000 - ($90,000 * 5% * 2) = $371,000

Book value per share of common stock = ($160,000 + $371,000) / 4000 = $132.75 per share

Solution e:

If two years preferred dividend in arrears then total amount of dividend paid to preferred shareholders = Dividend in arrear + Current year dividend = (90000*5%*2) + ($90,000*5%) = $13,500

Dividend to be paid to common shareholders = Total dividends - Dividend to preferred shareholders

= $26,600 - $13,500 = $13,100

Solution f:

Amount of dividends per share for the common stock = $13,100 / 4000 = $3.275 per share