Question

Question 7

IMA Believer Corp’s balance sheet reported the following shareholders’ equity as of December 31,

2016:

	Beginning of the Year	End of the Year
Current assets	$62,000	$82,000
Current liabilities	25,000	55,000
Plant and equipment	300,000	350,000
Long-term liabilities	50,000	75,000
Common shareholders’ equity	125,000	225,000
Preferred shareholders’ equity	60,000	85,000

Share Capital:
Preferred shares, $100 stated value; $5 cumulative, 10,000 shares authorized, 10,000 issued	$1,000,000
Common shares 200,000 shares authorized, 50,000 shares issued	500,000
Total share capital	$2,500,000
Retained earnings	500,000
Total shareholders’ equity	$3,000,000

1.    Assuming there are 3 years’ dividends in arrears (including that of the current year), determine (1)

preferred equity and (2) book value per share of common shares.

Answer 1

1. Preferred Equity:

Preferred dividends in arrears = $ 5 x 10,000 x 3years = $ 150,000.

Total preferred equity = $ 1,000,000 + $ 150,000 = $ 1,150,000

No of Shares = 10,000

Preferred equity per share = Total preferred equity / No of Shares

Preferred equity per share = $ 1,150,000 / 10,000 shares

= $ 115

2. Book value per share of common shares:

Common stock capital = Retained Earnings + Common Share Capital

**Retained Earnings available for common shares = Total Retained Earnings - Preferred dividends

= 500,000 - 150,000

= $350,000

Common stock capital = $350,000 + $ 500,000

= $ 850,000

Book value per share of common shares = Total Common stock capital / No of Shares issued

$ 850,000 / 50,000 = $ 17