# BVPS Qn

Morgan Inc. was organized on January 2, 1997 with the following capital structure: 10% cumulative preferred stock, par value \$100 and liquidation value \$105; authorized, issued and outstanding 1,000 shares, \$100,000 Common stock, par value \$25; authorized 100,000 shares; Issued and outstanding 10,000 shares, \$250,000 Morgan had net income of \$450,000 for its first year, but no dividends were declared. How much was Morgan’s book value per common share at December 31, 1997? a) \$45.00 b) \$69.50 c) \$70 d) \$25 e) \$68.50

D?

I’m going to have a crack at b) please Total capital: 100k+250k+450k=800k Prior charges to common equity: 105k So 695k/10k = \$69.5 per share.

Answer is E) 68.5 The book value per share of cumulative preferred stock is its liquidation value plus any dividends in arrears. Thus, the book value per preferred share is the \$105 liquidation value plus \$10 (\$100 X 10%) of dividends in arrears, or \$115. The total book value for preferred shares is \$115,000 (\$115 X 1000). The total book value of the company is \$800,000 (\$100,000 par value of preferred stock + \$250,000 par value of common stock + retained earnings equal to \$450,000 of net income). Hence, \$685,000 (\$800,000-115,000) is the book value of the common stock, and book value per common share is \$68.50 (\$685,000 / 10,000 shares).

Of course, it’s preferred stock, not debt so the divi comes out of net income.

good question

what about direct way to calculate common stock value? (net income-preferred stock dividend)/# of common stocks so we get, (450K-10%*100*1K)/10K=44 Unfortunately, none of choice provided matches mine. I cannot think of why i am wrong tho

singlesong80 Wrote: ------------------------------------------------------- > what about direct way to calculate common stock > value? > > (net income-preferred stock dividend)/# of common > stocks > > so we get, (450K-10%*100*1K)/10K=44 > > Unfortunately, none of choice provided matches > mine. > > I cannot think of why i am wrong tho You are calculating EPS, not BVPS.

with reference to raghu’s explanation above… Why do we calculate a modified preferred stock value, then subtract it away from a total book value containing original figures to obtain a “true” book value?

sneaky question maan