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  • 1.  Book value per share

    Posted 07-09-2020 01:11 PM
    Question 1
    At the end of its fiscal year on December 31, 2000, Merit Watches had total shareholders' equity of $24,209,306. Of this total, $3,554,405 was preferred equity.

    During the 2001 fiscal year, Merit's net income after tax was $2,861,003. During 2001, Merit paid preferred share dividends of $223,551 and common share dividends of $412,917. At December 31, 2001, Merit had 12,195,799 common shares outstanding and the company did not sell any common shares during the year.

    What was Merit Watch's book value per share on December 31, 2001?

    $1.99.
    $2.17.

    $1.88.
    $2.20.
    You Answered Correctly!
    Book value per share is calculated as:

    Book value per share = (common stock equity) ÷ (average number of common stock shares outstanding)

    The common stock equity at December 31, 2001 is equal to the total stock equity at December 31, 2000 plus the net income for 2001, less the 2001 dividends, less the preferred equity.

    Common stock equity at 12/31/01 = (total stock equity at 12/31/00) + (2001 net income) − (2001 dividends) − (preferred equity)

    Common stock equity at 12/31/01 = $24,209,306 + $2,861,003 − $223,551 − $412,917 − $3,554,405

    Common stock equity = $22,879,436

    Book value per share = $22,879,436 ÷ 12,195,799 shares = $1.88 per share.

    Question 2
    ABC Company has revenues of $5,000,000, with net income of $750,000. Its total assets are $6,000,000 (with current assets of $1,500,000), and its total liabilities are $2,500,000 (with current liabilities of $500,000). This leaves equity of $3,500,000, of which $500,000 is preferred shareholders' equity. ABC Company has 1,000,000 shares of common stock outstanding. What is ABC Company's book value per common share?

    $3.
    $3.50.
    $6.
    $5.
    You Answered Correctly!
    Book value per share is calculated by dividing common shareholders' equity by number of shares outstanding. Common shareholders' equity is $3,000,000 ($3,500,000 total equity − $500,000 preferred shareholders' equity). Book value per share is $3 ($3,000,000 common equity ÷ 1,000,000 shares).


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