Hi Bradley,
Normally authors and researchers on problem solving always integrate some mental obstacles
that include functional fixedness, irrelevant information, and assumptions. Assumptions: When dealing with a problem, people often make assumptions about the constraints and obstacles that prevent certain solutions.1) In the given illustration, your approach is do an assumption (to take it as its Face Value). Means that these Selected Financial Information are already final and thus Income Statement Accounts (net income & Dividends) are Irrelevant.
2) Remember that the Market To Book ratio formula or (MB%) is = Market Price Per Share (MPPS) ÷ Book Value Per Share (BVPS)***
3) BVPS = (Total Share Holders Equity - Preferred Shares) ÷ No. of CS Outstanding
BVPS = $33 Million ÷ 3million shares = $11.00
4) In this illustration there is no Preference Shares Account under Equity section.
5) Thus, your total SHE should are only the CS+APIC+RE = $33,000,000 ÷ 3 Million Shares**
** $ 3,000,000 ÷ $ 1.00 Par Value = 3,000,000 total Common Share Holders outstanding
Hence finally to get the value of Estimated per Share or the Market Price Per Share:
BVPS ........................................................ = $11.00
Multiply (x) MB% (already given)............... 1.5
= Market Price Per Share or Est. Price/Share= $16.50------------------------------
Mark Anthony Pusing
Accountant
Blue Steel Factory W.L.L.
Doha
Qatar
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Original Message:
Sent: 01-20-2022 08:19 PM
From: Bradley Bigio
Subject: Calculating Retained Earnings - Book Value Per Share - CMA Part 2
Hi All,
Please see the question below, followed by an explanation of my confusion:
Fact Pattern: Bull & Bear Investment Banking is working with the management of Clark, Inc., in order to take the company public in an initial public offering. Selected financial information for Clark is as follows.Long-term debt (8% interest rate) | $10,000,000 |
Common equity: | |
Par value ($1 per share) | 3,000,000 |
Additional paid-in-capital | 24,000,000 |
Retained earnings | 6,000,000 |
Total assets | 55,000,000 |
Net income | 3,750,000 |
Dividend (annual) | 1,500,000 |
If public companies in Clark's industry are trading at a market to book ratio of 1.5, what is the estimated value per share of Clark?
The correct answer is $16.50. This is arrived at by first determining the book value per share. As you know, the numerator is total common equity, or total equity less preferred equity. This would include the CS par value and APIC, $3,000,000 and $24,000,000, and the retained earnings balance of $6,000,000. My next thought was to adjust the retained earnings balance for the effect of net income and dividends, but that does not produce the correct answer. When provided with figures for dividends and net income alongside the retained earnings balance, how are we supposed to know when to adjust retained earnings vs. assume the balance is final? Thanks in advance for your help.
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Bradley Bigio
Analyst
Cocoa FL
United States
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