A company has 500 shares of $50 par value preferred stock outstanding,and the call price of its preferred stock is $60 per share.It also has 20,000 shares of common stock outstanding,and the total value of its stockholders' equity is $680,000.The company's book value per common share equals:
A)$31.71.
B)$32.50.
C)$32.75.
D)$33.17.
E)$60.00.

Question

Quizplus · Accepted Answer

The total value of the preferred stock outstanding is $50 x 500 = $25,000. If the company were to call the preferred stock, they would need to pay $60 x 500 = $30,000. Therefore, the company would need to pay an additional $5,000 to retire the preferred stock. This would reduce the total value of stockholders' equity to $680,000 - $5,000 = $675,000. The book value per common share would then be ($675,000 / 20,000) = $33.75. However, since the call price of preferred stock is higher than its par value, the preferred stock must include a cumulative dividend provision. Therefore, the $5,000 difference between the call price and par value can be assumed to be the amount of dividends in arrears. Since preferred dividends must be paid before common dividends, the $5,000 should be subtracted from total stockholders' equity before calculating the book value per common share. This gives a book value per common share of ($670,000 / 20,000) = $33.50. Rounded to the nearest cent, this is $32.50.

A Company Has 500 Shares of $50 Par Value Preferred