Question

Raphael Corporation’s common stock is currently selling on a stock exchange at $171 per share, and its current balance sheet shows the following stockholders’ equity section:

Preferred stock—5% cumulative, $___ par value, 1,000 shares authorized, issued, and outstanding	$	85,000
Common stock—$___ par value, 4,000 shares authorized, issued, and outstanding		200,000
Retained earnings		340,000
Total stockholders' equity	$	625,000
1. What is the current market value (price) of this corporation’s common stock? 2. What are the par values of the corporation’s preferred stock and its common stock? 3. If no dividends are in arrears, what is the book value per share of common stock? 4. If two years’ preferred dividends are in arrears, what is the book value per share of common stock? 5.1 If two years’ preferred dividends are in arrears and the board of directors declares cash dividends of $20,850, what total amount will be paid to the preferred and to the common shareholders?

Answer 1

Requirement 1

Current market value of common stock = number of shares outstanding x market share price

=4,000*171 = 684,000

Requirement 2

Par value of preferred stock = 85,000/1000 =$ 85

Par value of common stock =200,000/4000 =$50

Requirement 3

Book value per share of common stock if no preferred dividend arrears

= (200,000 + 340,000) /4000 = $135  

Requirement 4

Book value per share of common stock if two years preferred dividends are in arrears

= (200,000+ 340,000 - (85000*5%*2))/4000

= 132.875 or 132.88

Requirement 5

Total amount will be paid to the preferred and to the common share holders

=( 85000*5%*2)+20850

=$29,350