Question

Sweet Inc. began operations in January 2018 and reported the following results for each of its 3 years of operations. 2018 $242,000 net loss 2019 $40,000 net loss 2020 $875,000 net income At December 31, 2020, Sweet Inc. capital accounts were as follows. $480,000 7% cumulative preferred stock, par value $100; authorized, issued, and outstanding 4,800 shares Common stock, par value $1.00; authorized 1,000,000 shares; issued and outstanding 729,000 shares $729,000 Sweet Inc. has never paid a cash or stock dividend. There has been no change in the capital accounts since Sweet 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.) Book value per share $ (b) Compute the book value of the common stock at December 31, 2020, assuming that the preferred stock has a liquidating value of $105 per share. (Round answers to 2 decimal places, e.g. $38.50.) Book value per share $

Answer 1

Solution a:
Computation of Total Stockholders Equity
Preferred Stock		480000
Common Stock		729000
Retained earnings (875000-40000-242000)		593000
Total stockholder's equity		1802000
Computation of Book Value per Share
Total stockholder's equity		1802000
Less: Value of Preferred stock
Preferred dividend for 3 years (480000*7%*3)	100800
Liquidating value of preferred stock	480000
Equity available for preferred stockholder		580800
Equity available for common stockholder		1221200
/ Number of Common share outstanding		729000
Book value per share		1.68
Solution b:
Computation of Book Value per Share
Total stockholder's equity		1802000
Less: Value of Preferred stock
Preferred dividend for 3 years (480000*7%*3)	100800
Liquidating value of preferred stock (4800 shares*$105)	504000
Equity available for preferred stockholder		604800
Equity available for common stockholder		1197200
/ Number of Common share outstanding		729000
Book value per share		1.64