Question

Payout Ratio and Book Value per Share

Divac Company has developed a statement of stockholders' equity for the year 2017 as follows:

	Preferred Stock	Paid-In Capital— Preferred	Common Stock	Paid-In Capital— Common	Retained Earnings
Balance, Jan. 1	$100,000	$50,000	$400,000	$40,000	$200,000
Stock issued			100,000	10,000
Net income					82,000
Cash dividend					-50,000
Stock dividend	10,000	5,000			-15,000
Balance, Dec. 31	$110,000	$55,000	$500,000	$50,000	$217,000

Divac’s preferred stock is $100 par, 8% stock. If the stock is liquidated or redeemed, stockholders are entitled to $120 per share. There are no dividends in arrears on the stock. The common stock has a par value of $5 per share. Assume that the common stockholders have a right to the total net income of $82,000.

Required:

1. Determine the dividend payout ratio for the common stock. Round the payout ratio to four decimal places, but enter as a percentage to two decimal places. For example, .34678 rounds to .3468 and would be entered as 34.68, indicating 34.68%.
%

2. Determine the book value per share of Divac’s common stock. Round the book value per share to two decimals.
$ per share

Answer 1

Answer:

1. Determine the dividend payout ratio for the common stock.

Dividend payout ratio for common stock

60.98%

2. Determine the book value per share of Divac’s common stock.

Book value per share

8.00

Calculation:

1.

To calculate the dividend payout ratio, we need to divide the cash dividend with net income and multiply the obtained result by 100.

So,

Dividend Payout Ratio = Cash Dividend / Net Income × 100

            = 50,000 / 82,000 x 100 = 60.98%

2.

First we need to calculate the number of shares for preferred stock for that we need to divide the total value of preferred stock with par value per share of preferred stock.

Number of Shares for Preferred Stock = Total Value of Preferred Stock / Par Value Per Share of Preferred Stock = 110,000 /100 = 1,100

Then multiply number of shares of preferred stock with liquidation price per share, to get liquidation value of preferred stock.

Liquidation Value of Preferred Stock = Number of Shares of Preferred Stock × Liquidation Price Per Share = 1,100 x 120 = 132,000

Next we need to calculate the total stockholders' equity.

Total Stockholders Equity ′ = Preferred Stock + Paid in Capital Preferred + Common Stock + Paid in Capital Common + Retained Earnings = 11,000 + 55,000 + 500,000 + 50,000 + 217,000 = 932,000

Then we need to deduct liquidation value of preferred stock, from total stockholders' equity, to get the net assets applicable to common stock.

Net Assets Applicable to Common Stock = Total Stockholders Equity ′ − Liquidation Value of Preferred Stock = 932,000 - 132,000 = 800,000

Then we need to calculate the number of shares of common stock  by dividing the total value of common stock with par value per share of common stock

Number of Shares of Common Stock = Total Value of Common Stock /  Par Value Per Share of Common Stock = 500,000 / 5 = 100,000

Last, to calculate the book value per share, we need to divide net assets applicable to common stock with number of shares of common stock

Book Value Per Share = Net Assets Applicable to Common Stock / Number of Shares of Common Stock Net Assets Applicable to Common Stock = 800,000 / 100,000 = 8.00