Question

Delta Tech Corporation’s common shares are currently selling on a stock exchange at $74.50 per share, and a recent balance sheet shows the following information:

Delta Tech Corporation
Equity Section of Balance Sheet
April 30, 2017
Contributed capital:
Preferred shares, $2.50 cumulative, 2,000 shares authorized,        issued and outstanding	$	184,000
Common shares, 8,000 shares authorized, issued, and outstanding		256,000
Total contributed capital	$	440,000
Retained earnings		400,000
Total equity	$	840,000

Required:
Preparation Component:
1. What is the market value of the corporation’s common shares?     



2. How much capital was contributed by the residual owners of the company?     



3. If no dividends are in arrears, what are the book values per share of the preferred shares and the common shares?     



4. If two years’ preferred dividends are in arrears, what are the book values per share of the preferred shares and the common shares? (Round the final answers to 2 decimal places.)    



5-a. If two years’ preferred dividends are in arrears and the board of directors declares dividends of $21,000, what total amount will be paid to preferred and common shareholders?        



5-b. What is the amount of dividends per share for the common shares? (Round the final answer to 3 decimal places.)        

Answer 1

1) Market value of common share=8000 shares * $74.50=$596,000

2)capital contributed by residual owners=preferred shares=$184,000

3)book value per share if no dividend is in arrears=preferred shares=$184,000/2,000=$92

common shares=($256,000+$400,000)/8,000=$82

4)If two years dividends preference dividend are in arrears

Stockholder's equity applicable to preferrence share=$184,000+$5,000($2.50 *2000)+$5,000=$194,000

book value of preferred stock=$194,000/2,000=$97

now your retained earnings will be decreased by $10,000 because you allocated preferrene dividen

Equity for common shareholdes=$256,000+$390,000($400,000-$10,000)=$646,000

book value of common stock=$646,000/8000=$80.75

5a) If two years’ preferred dividends are in arrears and the board of directors declares dividends of $21,000 in current year , so dividend will be first allocated to preferrence shares which is $5,000 for the current year and $10,000 for the pass two years

so your preferrence dividend is $15,000

and remaining $6000 is dividend for common stock

5b) dividend per share for common stock=$6,000/8000=$0.75 per share