# CMA Study Group

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Posted 01-20-2022 10:27 PM
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 numerator used to arrive at the answer, common equity, includes the par value, APIC, and retained earnings balances given. I thought the next step would be to adjust retained earnings using the net income and dividend values given, but this is not the case. How do we decide when to adjust the retained earnings balance for income/dividends versus assuming the stated retained earning balance is final?

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Analyst
Cocoa FL
United States
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Posted 01-21-2022 04:16 AM

Formula for calculating Book Value (BV) = Total Equity - Preferred Equity / Nos of common shares outstanding.

Net Income or Dividends don't come into the picture, hence, the figures given in this problem are a diversion. Total Equity will only include the elements you have mentioned above.

Its only when you have been asked how much dividend was paid for a particular year or say if you are asked to calculate Dividend Payout Ratio, examiners might give only Retained Earnings & Net Income figures. Now to get the Dividend paid we will use this formula, Net Income - Retained Earnings.

This is where we would use figures from Net Income and Retained Earnings to derive at Dividends paid.

In case if I missed out anything, please feel free to correct me.

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Jay Chowdhury
Mumbai India
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