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 67,000 Cash dividend -50,000 Stock dividend 10,000 5,000 -15,000 Balance, Dec. 31 $110,000 $55,000 $500,000 $50,000 $202,000 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 $67,000. 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. $

Answer 1

1.   Dividend payout ratio: $50,000/$67,000 = 74.63%

Given that the common stockholders have a right to the total net income of $67,000. The preferred stock is not cumulative, and it does not indicate that a cash dividend was declared to the preferred stockholders. Further, it appears that the preferred stockholders received a stock dividend during the year, rather than a cash dividend. Therefore, the $50,000 of income should be attributable to the common stockholders.

2.   Book value per share:

      Total stockholders’ equity

            Preferred stock                                                                                                         $110,000

            Paid-in capital—Preferred                                                                                           55,000

            Common stock                                                                                                           500,000

            Paid-in capital—Common                                                                                           50,000

            Retained earnings                                                                                                       202,000

                                                                                                                                             $917,000

      Less:     Liquidation value of preferred stock (1,100 shares × $120)                               132,000

            Net assets applicable to common stock                                                                   $785,000

      Number of shares of common stock:

            $500,000/$5 per share = 100,000 shares

      Book value per share = $785,000/100,000 = $7.85