Patterson Research has 200 shares of 10%,$100 par value,preferred stock,and 2000 shares of $10 par value common stock outstanding.Total paid-in capital is $40,000,and retained earnings are $0.There are one-year dividends in arrears on preferred stock.The book value per share on common stock is:

Question

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The book value per share of common stock can be calculated as:

Book value per share = Total shareholder equity / Number of common shares outstanding

Total shareholder equity is the sum of paid-in capital and retained earnings. In this case, the retained earnings are zero and the paid-in capital is $40,000. However, the preferred stock has a liquidation preference, which means that the preferred shareholders have a claim to the assets of the company before the common shareholders in the event of liquidation.

Since the preferred stock has one-year dividends in arrears, the preferred shareholders have a claim to at least $2,000 (200 shares x $100 par value x 10% dividend rate x 1 year) of the $40,000 in paid-in capital. Therefore, the total shareholder equity available to the common shareholders is $38,000 ($40,000 - $2,000).

The number of common shares outstanding is 2,000. Therefore, the book value per share of common stock is:

Book value per share = $38,000 / 2,000 = $19

However, this is before taking into account the one-year dividends in arrears on the preferred stock. Since the preferred shareholders must receive their dividends in full before any dividends can be paid to the common shareholders, the common shareholders do not have a claim to the $2,000 in arrears. Therefore, the total shareholder equity available to the common shareholders is reduced by $2,000, leaving $36,000.

The revised book value per share of common stock is:

Book value per share = $36,000 / 2,000 = $18

Since the par value of the common stock is $10, the book value per share is less than the par value. This is because the company has not yet generated any retained earnings, and the preferred stock has a liquidation preference. Therefore, the correct answer is D) $9.

Patterson Research Has 200 Shares of 10%,$100 Par Value,preferred Stock,and