# IMPORTANT QUESTION!!! BOOK VALUE OF EQUITY!!!

¶¶¶¶Sarah Lawton, CFA, gathered the following information about Dalton Computers Inc: -Common stock \$1.50 par value – Authorized: 5,000,000 shares -Common stock \$1.50 par value – Issued: 4,000,000 shares -Additional paid-in-capital: \$20 000 000 -Retained earnings: \$5 000 000 -Treasury stock (500,000 shares): \$10 000 000 -Current price per share: \$21 The price-to-book value of Dalton Computers is closest to: A. 2.3. B. 2.72. C. 3.5. D. 4.2. Anyone can resolve that??? That’s just impossible… How do you calculate the book value??? And that one as well… : ¶¶¶¶The latest annual report of Waterford Crossing Inc. contains the following data: Common stock \$0.50 par value – Issued (2,000,000 shares): \$1 000 000 Additional paid-in-capital: \$10 000 000 Retained earnings: \$4 000 000 Treasury stock (500,000 shares): \$5 000 000 Current price per share: \$15 The company’s ending inventories based on LIFO are valued at \$500,000 and a footnote to financial statements reports inventories valued using FIFO basis would be \$600,000. The company’s tax rate is 30%. The un-adjusted and adjusted price-to-book values of Waterford Crossing, respectively, are closest to: Unadjusted P/BV Adjusted P/BV A. \$1,88 \$1,81 B. \$1,88 \$1,94 C. \$2,25 \$2,10 D. \$2,25 \$2,42 Thanks!!!

Book value can be computed as follows: Par value: 1.5 * 4,000,000 = \$ 6 mn add : APIC 20 mn add: Retained earnings 5 mn Less: treasury stock (\$ 10mn) Net equity(book value) \$21 mn Net shares outstanding - 4mn (issued) less 0.5mn (treasury) = 3.5mn BV.share = \$21/3.5 = \$6/share Price to book value = 21/6 = \$3.5. you can follow the same for the next qustn. Hope this helps.

Common stock \$1.50 par value – Authorized: 5,000,000 shares -Common stock \$1.50 par value – Issued: 4,000,000 shares -Additional paid-in-capital: \$20 000 000 -Retained earnings: \$5 000 000 -Treasury stock (500,000 shares): \$10 000 000 -Current price per share: \$21 BV=[4,000,000 *1.5+20 000 000+5 000 000 -10 000 000]/(4,000,000- 500,000)=21,000,000/3,500,000=6 P/BV=21/6=3.5, answer C Common stock \$0.50 par value – Issued (2,000,000 shares): \$1 000 000 Additional paid-in-capital: \$10 000 000 Retained earnings: \$4 000 000 Treasury stock (500,000 shares): \$5 000 000 Current price per share: \$15 Unadjusted: BV = (\$1 000 000 +10 000 000 +4 000 000 - 5 000 000)/(2,000,000-500,000)=6.67 P/BV=2.25 Adjusted: Since the LIFO rezerve increased from 500,000 to 600,000, the difference from converting LIFO to FIFO results in a plus to RE, so adjusted BV should be greater than unadjusted BV, must be 2.42 Answer, D.

Actually, I have to make a correction to my previous statement: since adjusted BV is greater than unadjusted BV, P/adjusted BV should be LOWER not greater, so the answer must be C for the second question.

Ok but how do you calculate the new book value with FIFO adjustments… They don’t give us the increase in reserve… We can only deduct the LIFO reserve, but not the increase… so we can’t calculate COGS FIFO… then adjusted retained earnings…

The company’s ending inventories based on LIFO are valued at \$500,000 and a footnote to financial statements reports inventories valued using FIFO basis would be \$600,000. FIFO Inventory = LIFO Inventory + Reserve, the reserve is 600-500=100, the increase in equity (retained earnings in fact) would be (1-tax rate)*LIFO Reserve. The rest, meaning tax rate*Lifo Reserve, would increase DTL.

Nope… do not agree with that… The only way we could know how retained earnings would increase is with FIFO COGS compared with LIFO COGS… The difference between both (LIFO COGS - FIFO COGS) is the increase in pre-tax income and (1-T)(LIFO COGS - FIFO COGS) = Increase in N.I from using FIFO… then Retained Earnings would increase by the same amount. But we don’t have the increase in the LIFO reserves that would help us determine the FIFO COGS, because the formula is FIFO COGS = LIFO COGS - INCREASE IN LIFO RESERVE

It’s a good thing that we don’t need to agree on something. Consider this: half of the question is answered. You can pick either C, or D. Since COGS FIFO < COGS LIFO, it must be that NI FIFO > NI LIFO, hence, Equity FIFO > Equity LIFO, hence, higher BV under the adjusted statements, therefore lower P/BV under the adjsuted book value. Again, you can pick either C, or D. Which one would you choose?

Yeah… you’re right… I didn’t really check the multiple choice on that one… I guess I should use my deduction skills instead of always trying to get the numbers right… Thanks again! Hope that one is on the exam… We’ll kill it…

On part 2, if the difference were 1,000,000 in the inventory amounts then I can see answer C. Maybe a zero was dropped off. Because if you take a P/BV of 2.1, divide into 15, you get 7.14. Multiply that by 1,500,000 shares, you get about 10,700,000.

Just gotta say, love the title of this post LOL

I saw this Q too, and chose C by default. I actually went through the whole calculation of adjusting book value of equity up by .7*\$100,000 or \$70,000. But even when you add this to your book value of \$10,000,000 and use it as your denominator in the Price to book value calculation, you get 22,500,000/10,070,000 = 2.23. Not really sire where I am going wrong here.