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  • 1.  book value per share question

    Posted 05-25-2020 03:43 PM

    Maga Corp.'s stockholders' equity at December 31, Year 4, is comprised of the data shown here.

    Dividends on preferred stock have been paid through Year 3 but have not been declared for Year 4. At December 31, Year 4, Maga's book value per common share was: $5.5



    My question is that if preferred stock dividends had been declared for Year 4, would they still be subtracted out of total stockholders equity?? Thanks



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    Bradley Kilbreth
    Student
    Manchester NH
    United States
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  • 2.  RE: book value per share question

    Posted 05-26-2020 04:15 AM
    Hello Bradley,

    One major characteristic of Preferred Stock is the right "But not the obligation" to receive a dividend before the common stock. In this meaning, the issuer has to pay the dividend (Interest) case of cash availability, and to defer the accrued dividend if no cash available. It is the direct definition of "Accumulative Rights".
    Preferred stock has the form of debt in this meaning (Interest Accrual), while has no obligation of payment if there is no declaration of dividends (Equity form).

    "In arrears" of above calculated $300,000 should be paid in year 5 before any other dividends "Case of available cash", and can be deferred along with year's 5 dividend to year 6 and so on ... if no cash available

    Conclusion: At any case, we should account for accrued dividends despite of the declaration announcement.

    For more info, please check this links:

    Kind regards

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    Samer Ahmad, FMVA, SCA
    Kuwait
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  • 3.  RE: book value per share question

    Posted 05-26-2020 07:39 AM
    Thanks Samer! Your answers are always so in-depth and are the best.
    One more quick question for if you don't mind.

    When calculating payout, dividend yield, P/E ratios, is it always assumed that these are strictly for common shareholders unless stated otherwise?

    Meaning, if I was told to calculate the payout ratio, would I do the dividends per common share / (Net income - preferred dividends)?

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    Bradley Kilbreth
    Student
    Manchester NH
    United States
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  • 4.  RE: book value per share question

    Posted 05-26-2020 09:07 AM
    Always welcome

    Yes my friend, all market ratios are used to evaluate the business profitability compared to market rates from the shareholder's perspective (To measure the return on investment in common stock equity).

    Payout, dividend yield, P/E and other market ratios are always calculated for common shareholders. 

    e.i. If you want to buy Amazon's stock .. You will use these ratios along with DCF module and other financial analysis tools in order to know how much you will earn by owning this "common" stock.

    Kind regards

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    Samer Ahmad, FMVA, SCA
    Kuwait
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