Question

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Raphael Corporation’s balance sheet shows the following stockholders’ equity section.

Preferred stock—5% cumulative, $___ par value, 1,000 shares authorized, issued, and outstanding	$	75,000
Common stock—$___ par value, 4,000 shares authorized, issued, and outstanding		200,000
Retained earnings		310,000
Total stockholders' equity	$	585,000

1. What are the par values of the corporation’s preferred stock and its common stock?

2. If no dividends are in arrears at the current date, what is the book value per share of common stock?

3. If two years’ preferred dividends are in arrears at the current date, what is the book value per share of common stock?

4. If two years’ preferred dividends are in arrears at the current date and the board of directors declares cash dividends of $21,250, what total amount will be paid to the preferred and to the common shareholders?

Answer 1

Answer:

1.)

	Par Value
Corporations Preferred stock($75,000/1000 shares)	$75
Corporations Common stock($200,000/4000 shares)	$50

2.)

Book value per share = (Common Stock +retained earning) / number of common shares

Book value per share =($200,000 + $310,000) / 4,000 shares

= $510,000 / 4,000

= $127.50 per share

3.)

If 2 years of preferred dividend are in arrears then the dividend will be paid from the Retained earnings

Preferred dividend for 2 years =$75,000*5%*2 years =$7,500

Revised Stockholders equity =$510,000 - $7,500 =$502,500

Book value per share =$502,500 / 4,000 shares =$125.625 per share

4.)

Preferred dividend= 2 years arrears dividend + Current year dividend = $75000*5%*3 = $11,250

Common stock dividend = Total declared dividend - Preferred share dividend

= $21,250 - $11250

= $10,000