Morgan Inc. | Book Value per Common Share Calculation

Book Value per Common Share Calculation

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Question

Morgan Inc. was organized on January 2, 1997 with the following capital structure:

10% cumulative preferred stock, par value $100 and liquidation value $105; authorized, issued and outstanding 1,000 shares, $100,000

Common stock, par value $25; authorized 100,000 shares;

Issued and outstanding 10,000 shares, $250,000

Morgan had net income of $450,000 for its first year, but no dividends were declared. How much was Morgan's book value per common share at December 31,

1997?

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The book value per share of cumulative preferred stock is its liquidation value plus any dividends in arrears. Thus, the book value per preferred share is the $105 liquidation value plus $10 ($100 X 10%) of dividends in arrears, or $115. The total book value for preferred shares is $115,000 ($115 X 1000). The total book value of the company is $800,000 ($100,000 par value of preferred stock + $250,000 par value of common stock + retained earnings equal to $450,000 of net income). Hence, $685,000 ($800,000-115,000) is the book value of the common stock, and book value per common share is $68.50 ($685,000 / 10,000 shares).

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