Question

Marigold Inc. began operations in January 2018 and reported the following results for each of its 3 years of operations.

2018

$268,000 net loss

2019

$38,000 net loss

2020

$775,000 net income

At December 31, 2020, Marigold Inc. capital accounts were as follows.

8% cumulative preferred stock, par value $100; authorized, issued,
and outstanding 4,500 shares		$450,000
Common stock, par value $1.00; authorized 1,000,000 shares;
issued and outstanding 741,000 shares		$741,000

Marigold Inc. has never paid a cash or stock dividend. There has been no change in the capital accounts since Marigold began operations. The state law permits dividends only from retained earnings.

(a) Compute the book value of the common stock at December 31, 2020. (Round answers to 2 decimal places, e.g. $38.50.)

(b) Compute the book value of the common stock at December 31, 2020, assuming that the preferred stock has a liquidating value of $107 per share. (Round answers to 2 decimal places, e.g. $38.50.)

Book value per share

$enter a dollar amount of the book value of the common stock at December 31, 2020 rounded to 2 decimal places

Answer 1

Step 1 :- Basic Data

Operational profit

2018 : $ 268000 Net Loss

2019 : $ 38000 net Loss

2020 : $ 775000 Net Income

8% preference Stock : $ 450000

Common Stock : $ 7410000

Step 2 :- Computation of Networth or total book value

In the given instance, cumulative prefernce share has been given

Cumilative preference shareholders have the right to receive fixed rate of dividend from the profit of the company. If company results in loss, such dividend shall be cumulated to succeeding financial year till it results in profit.

Therefore, the year which results in profit the company has to pay the preference dividend cumulated from preceeding financial year due to net loss. In the given question, in the F.Y 2018 and 2019 company results in net loss where company has not paid preferencial dividend. In the year 2020, company results in net income therefore has to pay the current year dividend plus 2018 and 2019 cumulative dividend also.

As part of computation of book value of company, first we have to deduct cumualtive dividend for the F.Y 2018 and 2019 from net income of financial year 2020

1. Computation of networth in 2018:

  

2. Computation of networth for the financial year 2019 :-

  

3. Computation of Net Income for the financial year 2020 after adjusting preferencial dividend :-

  

4. Computation of Networth for 2020

Step 3 :- Final Answer to the given Question

(a) Value per Share for common Stock Holders

Networth or book value attributable to common stock holders in 2020 :-

Value per share = Networth / Number of common Stock

Ie, = $ 11,02,000/741000 shares

= $ 1.49/Share

(B) It is given value of preference share as S 107 per share

Therefore, Networth attributale to coomon stock holders in 2020 is as follows :-

Vaue of common stock = Networth / Number of Shares

= $ 1070500/741000 shares

= $ 1.44 per Share

Meaning of some terms :

Networth means book value of the company which shall include share capital + preference share capital + retained earnings.

Netwoth or book value to common stock means book value of the firm shall deduct prefernce share capital

Net Income means income after deducting all expenses excluding preferencial dividend.