Mb101 Accounting (New)

Tan Ti FenCui Dong YaoLim Ming HuiMelissa TanMB101 AccountingTutorial 4: Question 4

Lecture 4: Stockholders’ Equlity[Preferred and Common Stock] Tutorial 4 : Question 4 Rachael Corporation’s common stock is currently selling on stock exchange at $85 per share, and its current balance sheet shows the following stockholders’ equity section

Lecture 4: Stockholders’ Equlity[Differences between Common stock and Preferred stock stock] Common stock vs Preferred Stock YESNONOYESYESNONo Voting rights

Priority over stockholders during liquidation

Residual Owners during liquidation

No obligation to pay dividendsLecture 4: Stockholders’ Equlity[Market value and Issue value] Question (4a) What is the current market value of this corporation’s common stock?

Lecture 4: Stockholders’ Equity [Quick Refresh ! ] Looking at the question again….. Rachael Corporation’s common stock is currently selling on stock exchange at $85 per share, and its current balance sheet shows the following stockholders’ equity sectionPrice shown are issue price of stock to shareholders.

Market Values do not appear in the equity sheet of the corporation! Lecture 4: Stockholders’ Equlity[Market Value] Question (4a) What is the current market value of this corporation’s common stock?Answer: $85 x 4000 = $340 000

Lecture 4: Stockholders’ Equlity[Calculating Book value]Question (4b) If no dividend are in arrears, what is the book value per share of common stock?

Lecture 4: Stockholders’ Equlity[Calculating Book value: Quick Refresh!]4b) Ifno dividend are in arrears, what is the book value per share of common stock?No dividend are in arrears?No unpaid dividend on cumulative preferred shares. If there is any unpaid dividend, it must be paid before paying any current dividends on the preferred shares and common shares.

Lecture 4: Stockholders’ Equity [Calculating Book value: Quick Refresh!]4b) If no dividend are in arrears, what is the book value per shareof common stock?THE FORMULA : Deriving Total stockholders equity: Inclusive of : Common StockInclusive of :Preferred Stock and Preferred dividends in arrears) Inclusive of: Retained Earnings

Lecture 4: Stockholders’ Equlity[Calculating Book value: Answer for 1b]If no dividend are in arrears, what is the book value per share of common stock?Answer:Total book value of common stock= (total stockholders’ equity) - (preferred stock)= $280,000 - $50,000= $230,000Book value per share of common stock= (total book value of common stock) / (no. of shares issued and outstanding)= $230,000 / 4,000= $ 57.50

Lecture 4: Stockholders’ Equlity[Calculating book value per share with Cumulative preferred dividend]Question (4C) c) If 2 years’ preferred dividend are in arrears, what is the book value per share of common stock?

Lecture 4: Stockholders’ Equlity[Calculating book value per share with Cumulative preferred dividend]4c) If 2 years’ preferred dividend are in arrears, what is the book value per share of common stock?2 years’ preferred dividend are in arrears….Since there is unpaid dividend on cumulative preferred stock

The total amount owed to preferred stockholders must be paid first.

Not to forget current year preferred dividendsto be paid first too.Lecture 4: Stockholders’ Equlity[Calculating book value per share with Cumulative preferred dividend]c) If 2 years’ preferred dividend are inarrears, what is the book value per share of common stock?Answer: Total amount of 2 years’ preferred dividend in arrears= (3 years)(Percentage of preferred dividend x preferred stock) = (3)( 5% x $50,000)= $7,500Total book value of common stock= (Total stockholders’ equity)- (Preferred stock)- (2 years’ Preferred dividend in arrears)= $280,000 - $50,000 - $7,500= $222,500

Lecture 4: Stockholders’ Equlity[Calculating book value per share with Cumulative preferred dividend]Continue….c) If 2 years’ preferred dividend are inarrears, what is the book value per share of common stock?Answer: Book value per share of common stock= (Total book value of common stock)/ (No. of shares issued and outstanding)= $222,500 / 4,000= $ 55.63 (nearest cent)This calculation procedure reflects the fact that the common stockholders are the residual owners of the corporate entity.

Lecture 4: Stockholders’ Equlity[Allocation of Dividends between Preferred and Common stock]4d) Part 1) If two years’ preferred dividends are in arrears and the board of directors declares cash dividends of $11,500, what total amount will be paid to the preferred and to the common shareholders? Answering this question in 3 steps: Step 1: Preferred dividends in arrears (must pay, 5% cumulative) Step 2: Current year preferred dividends (paid before common dividends)Step 3: Current year common dividendsCash Dividends of $11,500

Lecture 4: Stockholders’ Equlity[Allocation of Dividends between Preferred and Common stock]Step 1: Preferred dividends in arrears (must pay, 5% cumulative)Total amount of preferred stock: $50,000Dividend rate: 5%Time: 2 years Preferred dividend= Principal x dividend rate x timeTotal amount of preferred dividends in arrears:$50,000 x 5% x 2=$5000

Lecture 4: Stockholders’ Equity [Allocation of Dividends between Preferred and Common stock]Step 2: Current year preferred dividends (paid before common dividends)Total amount of preferred stock: $50,000Dividend rate: 5%Time: 1 yearCurrent year amount of preferred dividends:$50,000 x 5% x 1=$2500Total amount of preferred dividends:$5000 + $2500=$7500

Lecture 4: Stockholders’ Equlity[Allocation of Dividends between Preferred and Common stock]Step 3: Current year common dividendsDeriving Common stock dividends: Total Cash dividends - 3years of Cumulative Preferred dividends = Common dividends. $11,500-$5000-$2500=$4000

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