1.
Introduction:Common stock refers to the securities of a company issued to public to generate capital for the company. Holder of these securities are called stockholders. The market value of common stock is calculated by multiplying the current market price per share of common stock with the total number of outstanding shares.
To calculate:The current market value of the corporation’s common stock.
1.
Explanation of Solution
The current market value of the corporation’s common stock is $85.
2.
Introduction:Common stock& preferred stock refers to the securities of a company issued to public to generate capital for the company. Par value of preferred stock & common stock refers to the value of securities stated in the legal documents of the company.
To calculate:The par value of corporation’s preferred stock & common stock.
2.
Explanation of Solution
Preferred stock value: $50,000
Number of
The par value of preferred stock:
Common stock value: $80,000
Number of common stocks: 4,000
The par value of common stock:
3.
Introduction:Common stock & preferred stock refers to the securities of a company issued to public to generate capital for the company. Book value of securities is calculated by dividing the value of securities in the books by the total number of outstanding securities.
To calculate:The book value of preferred stock and common stock if there is no arrear of dividends.
3.
Explanation of Solution
Preferred stock value: $50,000
Number of preference shares: 1,000
The book value of preferred stock:
Common stock value: $80,000
Number of common stocks: 4,000
The book value of common stock:
4.
Introduction:Common stock & preferred stock refers to the securities of a company issued to public to generate capital for the company. Book value of securities is calculated by dividing the value of securities in the books by the total number of outstanding securities.
To calculate:The book value of preferred stock and common stock if there is two years arrear of dividends.
4.
Explanation of Solution
Dividend for two years: (($50,000×5%) ×2) = $5,000
Preferred stock value: $50,000 + $5,000 = $55,000
Number of preference shares: 1,000
The book value of preferred stock:
Common stock value: $80,000
Retained earnings: $150,000
Dividend for two years: (($50,000×5%) ×2) = $5,000
Balance of retained earnings: $150,000 - $5,000 = $145,000
Number of common stocks: 4,000
The book value of common stock:
5.
Introduction:Common stock & preferred stock refers to the securities of a company issued to public to generate capital for the company. Book value of securities is calculated by dividing the value of securities in the books by the total number of outstanding securities.
To calculate:The book value of preferred stock and common stock if there is two years arrear of dividends and preferred stock is callable at $55 per share.
5.
Explanation of Solution
Callable price of preferred stock: $55 per share
Therefore, book value of preferred stock: $55
Common stock value:
Particular | Amount ($) |
Total | 280,000 |
Less: Value of preferred stock ($55×1,000) | 55,000 |
Less: two years dividend (($50,000×5%) ×2) | 5,000 |
Value of common stock | 220,000 |
Book value of common stock:
6.
Introduction:The owners of the securities of the company are called the stockholders. They receive an amount of money on their shareholding in the company. This amount is called as dividend.
To calculate:The amount of dividend per share to common stock if a dividend of $11,500 is declared by the board of director.
6.
Explanation of Solution
Dividend for two years: (($50,000×5%) ×2) = $5,000
Dividend for current year: ($50,000×5%) = $2,500
Total dividend: $5,000 + $2,500 = $7,500
Dividend declared by board: $11,500
Amount payable to preferred stock: $7,500
Amount payable to common stock: $11,500 - $7,500 = $4,000
Amount of dividend payable to common stock:
7.
Introduction:Book value of securities is calculated by dividing the value of securities in the books by the total number of outstanding securities.The market value of common stock is calculated by multiplying the current market price per share of common stock with the total number of outstanding shares.
To describe:The factors which contribute to the difference in the book value of common stock and the market value of common stock.
7.
Explanation of Solution
Thefactors which contributes to the difference in the book value of common stock & its market value is as follows:
- The book value does not reflect true resale value of the assets of the company:
The books show the assets at its purchased value. It does not show the current market price of the assets. Therefore, the assets in the books may shown at higher value than its actual value in the market. This makes the value of common stock less in market than the value shown in the books.
- Company’s future
cash inflows are more valuable than its book value:
The books show the assets at its purchased value. Book value of common stock is reflected by deducting the value of liabilities from the assets of the company.
The market value of common stock depends on the profits earned by the company. The company may have more future cash inflows which increases the market value of the common stock of the company.
These factors make a difference in the book value & market value of the common stock of the company.
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Chapter 11 Solutions
Financial Accounting: Information for Decisions
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