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1. Tan Ti Fen Cui Dong Yao Lim Ming Hui Melissa Tan MB101 AccountingTutorial 4: Question 4

2. Lecture 4: Stockholders’ Equlity [Preferred and Common Stock] Tutorial 4 : Question 4 Rachael Corporation’s common stock is currently selling on stock exchange at $85 per share, and its current balance sheet shows the following stockholders’ equity section

4. Priority over stockholders during liquidation

5. Obligated to pay dividends

6. Voting rights

7. Residual Owners during liquidation

11. Lecture 4: Stockholders’ Equlity [Calculating Book value] Question (4b) If no dividend are in arrears, what is the book value per share of common stock?

13. Lecture 4: Stockholders’ Equity [Calculating Book value: Quick Refresh!] 4b) If no dividend are in arrears, what is the book value per shareof common stock? THE FORMULA : Deriving Total stockholders equity: Inclusive of : Common Stock Inclusive of :Preferred Stock and Preferred dividends in arrears) Inclusive of: Retained Earnings

14. Lecture 4: Stockholders’ Equlity [Calculating Book value: Answer for 1b] If no dividend are in arrears, what is the book value per share of common stock? Answer: Total book value of common stock = (total stockholders’ equity) - (preferred stock) = $280,000 - $50,000 = $230,000 Book value per share of common stock = (total book value of common stock) / (no. of shares issued and outstanding) = $230,000 / 4,000 = $ 57.50

15. Lecture 4: Stockholders’ Equlity [Calculating book value per share with Cumulative preferred dividend] Question (4C) c) If 2 years’ preferred dividend are in arrears, what is the book value per share of common stock?

17. The total amount owed to preferred stockholders must be paid first.

19. Lecture 4: Stockholders’ Equlity [Calculating book value per share with Cumulative preferred dividend] Continue….c) If 2 years’ preferred dividend are inarrears, what is the book value per share of common stock?Answer: Book value per share of common stock = (Total book value of common stock)/ (No. of shares issued and outstanding) = $222,500 / 4,000 = $ 55.63 (nearest cent) This calculation procedure reflects the fact that the common stockholders are the residual owners of the corporate entity.

20. Lecture 4: Stockholders’ Equlity [Allocation of Dividends between Preferred and Common stock] 4d) Part 1) If two years’ preferred dividends are in arrears and the board of directors declares cash dividends of $11,500, what total amount will be paid to the preferred and to the common shareholders? Answering this question in 3 steps: Step 1: Preferred dividends in arrears (must pay, 5% cumulative) Step 2: Current year preferred dividends (paid before common dividends) Step 3: Current year common dividends Cash Dividends of $11,500

21. Lecture 4: Stockholders’ Equlity [Allocation of Dividends between Preferred and Common stock] Step 1: Preferred dividends in arrears (must pay, 5% cumulative) Total amount of preferred stock: $50,000 Dividend rate: 5% Time: 2 years Preferred dividend= Principal x dividend rate x time Total amount of preferred dividends in arrears: $50,000 x 5% x 2=$5000

22. Lecture 4: Stockholders’ Equity [Allocation of Dividends between Preferred and Common stock] Step 2: Current year preferred dividends (paid before common dividends) Total amount of preferred stock: $50,000 Dividend rate: 5% Time: 1 year Current year amount of preferred dividends: $50,000 x 5% x 1=$2500 Total amount of preferred dividends: $5000 + $2500=$7500

23. Lecture 4: Stockholders’ Equlity [Allocation of Dividends between Preferred and Common stock] Step 3: Current year common dividends Deriving Common stock dividends: Total Cash dividends - 3years of Cumulative Preferred dividends = Common dividends. $11,500-$5000-$2500=$4000

24. Lecture 4: Stockholders’ Equlity [Allocation of Dividends between Preferred and Common stock] 4d)Part 2)What is the amount of dividends per share for the common stock? Amount of dividends per share = Total amount of common dividends Shares of common dividends = $4000/4000 =$1

25. Lecture 4: Stockholders’ Equity [Debt and Equity financing] Question (4e) Identify two reasons a corporation may choose to issue cumulative preferred stock rather than finance operation with long term debt.

26. Lecture 4: Stockholders’ Equity [Debt and Equity financing: Quick Refresh!] Debt vsEquity Has a maturity date Creditors of the business If business ceases, creditors must be paid in full Usually requires borrower to pay interest No maturity date Owners of the business If business ceases, stockholders might not get the full capital back Might receive dividend.

28. Unlike equity, debt must at some point be repaid.

30. Lenders  Less willing to loan funds to finance the company

31. Investors  Less confident to invest funds in the company

32. In long term, capital to finance the company is lower.