Tan Ti Fen<br />Cui Dong Yao<br />Lim Ming Hui<br />Melissa Tan<br />MB101 AccountingTutorial 4: Question 4<br />
Lecture 4: Stockholders’ Equlity<br />[Preferred and Common Stock] <br />Tutorial 4 : Question 4 <br />Rachael Corporation...
Lecture 4: Stockholders’ Equlity<br />[Differences between Common stock and Preferred stock stock] <br />Common stock vs P...
Priority over stockholders during liquidation
Obligated to pay dividends
Voting rights
Residual Owners during liquidation
No obligation to pay dividends</li></li></ul><li>Lecture 4: Stockholders’ Equlity<br />[Market value and Issue value] <br ...
Lecture 4: Stockholders’ Equity  <br />[Quick Refresh ! ] <br />Looking at the question again….. <br />Rachael Corporation...
Market Values do not appear in the equity sheet of the corporation! </li></li></ul><li>Lecture 4: Stockholders’ Equlity<br...
Lecture 4: Stockholders’ Equlity<br />[Calculating Book value]<br />Question (4b) <br />If no dividend are in arrears, wha...
Lecture 4: Stockholders’ Equlity<br />[Calculating Book value: Quick Refresh!]<br />4b) Ifno dividend are in arrears, what...
Lecture 4: Stockholders’ Equity  <br />[Calculating Book value: Quick Refresh!]<br />4b) If no dividend are in arrears, wh...
Lecture 4: Stockholders’ Equlity<br />[Calculating Book value: Answer for 1b]<br />If no dividend are in arrears, what is ...
Lecture 4: Stockholders’ Equlity<br />[Calculating book value per share with <br />Cumulative preferred dividend]<br />Que...
Lecture 4: Stockholders’ Equlity<br />[Calculating book value per share with <br />Cumulative preferred dividend]<br />4c)...
The total amount owed to preferred stockholders must be paid first.
Not to forget current year preferred dividendsto be paid first too.</li></li></ul><li>Lecture 4: Stockholders’ Equlity<br ...
Lecture 4: Stockholders’ Equlity<br />[Calculating book value per share with <br />Cumulative preferred dividend]<br />Con...
Lecture 4: Stockholders’ Equlity<br />[Allocation of Dividends between Preferred and Common stock]<br />4d) Part 1)  If tw...
Lecture 4: Stockholders’ Equlity<br />[Allocation of Dividends between Preferred and Common stock]<br />Step 1: Preferred ...
Lecture 4: Stockholders’ Equity  <br />[Allocation of Dividends between Preferred and Common stock]<br />Step 2: Current y...
Lecture 4: Stockholders’ Equlity<br />[Allocation of Dividends between Preferred and Common stock]<br />Step 3: Current ye...
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Mb101 Accounting (New)

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Mb101 Accounting (New)

  1. 1. Tan Ti Fen<br />Cui Dong Yao<br />Lim Ming Hui<br />Melissa Tan<br />MB101 AccountingTutorial 4: Question 4<br />
  2. 2. Lecture 4: Stockholders’ Equlity<br />[Preferred and Common Stock] <br />Tutorial 4 : Question 4 <br />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<br />
  3. 3. Lecture 4: Stockholders’ Equlity<br />[Differences between Common stock and Preferred stock stock] <br />Common stock vs Preferred Stock <br />YES<br />NO<br />NO<br />YES<br />YES<br />NO<br /><ul><li>No Voting rights
  4. 4. Priority over stockholders during liquidation
  5. 5. Obligated to pay dividends
  6. 6. Voting rights
  7. 7. Residual Owners during liquidation
  8. 8. No obligation to pay dividends</li></li></ul><li>Lecture 4: Stockholders’ Equlity<br />[Market value and Issue value] <br />Question (4a) <br />What is the current market value of this corporation’s common stock?<br />
  9. 9. Lecture 4: Stockholders’ Equity <br />[Quick Refresh ! ] <br />Looking at the question again….. <br />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<br /><ul><li>Price shown are issue price of stock to shareholders.
  10. 10. Market Values do not appear in the equity sheet of the corporation! </li></li></ul><li>Lecture 4: Stockholders’ Equlity<br />[Market Value] <br />Question (4a) <br />What is the current market value of this corporation’s common stock?<br />Answer: $85 x 4000 = $340 000<br />
  11. 11. Lecture 4: Stockholders’ Equlity<br />[Calculating Book value]<br />Question (4b) <br />If no dividend are in arrears, what is the book value per share of common stock?<br />
  12. 12. Lecture 4: Stockholders’ Equlity<br />[Calculating Book value: Quick Refresh!]<br />4b) Ifno dividend are in arrears, what is the book value per share of common stock?<br /><ul><li>No dividend are in arrears?</li></ul>No unpaid dividend on cumulative preferred shares. <br />If there is any unpaid dividend, it must be paid before paying any current dividends on the preferred shares and common shares.<br />
  13. 13. Lecture 4: Stockholders’ Equity <br />[Calculating Book value: Quick Refresh!]<br />4b) If no dividend are in arrears, what is the book value per shareof common stock?<br />THE FORMULA : <br />Deriving Total stockholders equity: <br />Inclusive of : Common Stock<br />Inclusive of :Preferred Stock and Preferred dividends in arrears) <br />Inclusive of: Retained Earnings<br />
  14. 14. Lecture 4: Stockholders’ Equlity<br />[Calculating Book value: Answer for 1b]<br />If no dividend are in arrears, what is the book value per share of common stock?<br />Answer:<br />Total book value of common stock<br />= (total stockholders’ equity) - (preferred stock)<br />= $280,000 - $50,000<br />= $230,000<br />Book value per share of common stock<br />= (total book value of common stock) / (no. of shares issued and outstanding)<br />= $230,000 / 4,000<br />= $ 57.50<br />
  15. 15. Lecture 4: Stockholders’ Equlity<br />[Calculating book value per share with <br />Cumulative preferred dividend]<br />Question (4C) <br />c) If 2 years’ preferred dividend are in arrears, what is the book value per share of common stock?<br />
  16. 16. Lecture 4: Stockholders’ Equlity<br />[Calculating book value per share with <br />Cumulative preferred dividend]<br />4c) If 2 years’ preferred dividend are in arrears, what is the book value per share of common stock?<br />2 years’ preferred dividend are in arrears….<br /><ul><li>Since there is unpaid dividend on cumulative preferred stock
  17. 17. The total amount owed to preferred stockholders must be paid first.
  18. 18. Not to forget current year preferred dividendsto be paid first too.</li></li></ul><li>Lecture 4: Stockholders’ Equlity<br />[Calculating book value per share with <br />Cumulative preferred dividend]<br />c) If 2 years’ preferred dividend are inarrears, what is the book value per share of common stock?Answer: <br />Total amount of 2 years’ preferred dividend in arrears<br />= (3 years)(Percentage of preferred dividend x preferred stock) <br />= (3)( 5% x $50,000)<br />= $7,500<br />Total book value of common stock<br />= (Total stockholders’ equity)- (Preferred stock)- (2 years’ Preferred dividend in arrears)<br />= $280,000 - $50,000 - $7,500<br />= $222,500<br />
  19. 19. Lecture 4: Stockholders’ Equlity<br />[Calculating book value per share with <br />Cumulative preferred dividend]<br />Continue….c) If 2 years’ preferred dividend are inarrears, what is the book value per share of common stock?Answer: <br />Book value per share of common stock<br />= (Total book value of common stock)/ (No. of shares issued and outstanding)<br />= $222,500 / 4,000<br />= $ 55.63 (nearest cent)<br />This calculation procedure reflects the fact that the common stockholders are the residual owners of the corporate entity.<br />
  20. 20. Lecture 4: Stockholders’ Equlity<br />[Allocation of Dividends between Preferred and Common stock]<br />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? <br />Answering this question in 3 steps: <br />Step 1: Preferred dividends in arrears <br />(must pay, 5% cumulative) <br />Step 2: Current year preferred dividends <br />(paid before common dividends)<br />Step 3: Current year common dividends<br />Cash Dividends of <br />$11,500<br />
  21. 21. Lecture 4: Stockholders’ Equlity<br />[Allocation of Dividends between Preferred and Common stock]<br />Step 1: Preferred dividends in arrears (must pay, 5% cumulative)<br />Total amount of preferred stock: $50,000<br />Dividend rate: 5%<br />Time: 2 years <br />Preferred dividend= Principal x dividend rate x time<br />Total amount of preferred dividends in arrears:<br />$50,000 x 5% x 2=$5000<br />
  22. 22. Lecture 4: Stockholders’ Equity <br />[Allocation of Dividends between Preferred and Common stock]<br />Step 2: Current year preferred dividends (paid before common dividends)<br />Total amount of preferred stock: $50,000<br />Dividend rate: 5%<br />Time: 1 year<br />Current year amount of preferred dividends:<br />$50,000 x 5% x 1=$2500<br />Total amount of preferred dividends:<br />$5000 + $2500=$7500<br />
  23. 23. Lecture 4: Stockholders’ Equlity<br />[Allocation of Dividends between Preferred and Common stock]<br />Step 3: Current year common dividends<br />Deriving Common stock dividends: <br />Total Cash dividends - 3years of Cumulative Preferred dividends = Common dividends. <br />$11,500-$5000-$2500=$4000<br />
  24. 24. Lecture 4: Stockholders’ Equlity<br />[Allocation of Dividends between Preferred and Common stock]<br />4d)Part 2)What is the amount of dividends per share for the common stock?<br />Amount of dividends per share<br /> = Total amount of common dividends <br /> Shares of common dividends<br />= $4000/4000<br /> =$1<br />
  25. 25. Lecture 4: Stockholders’ Equity <br />[Debt and Equity financing]<br />Question (4e) <br />Identify two reasons a corporation may choose to issue cumulative preferred stock rather than finance operation with long term debt. <br />
  26. 26. Lecture 4: Stockholders’ Equity <br />[Debt and Equity financing: Quick Refresh!]<br />Debt vsEquity<br />Has a maturity date<br />Creditors of the business<br />If business ceases, creditors must be paid in full<br />Usually requires borrower to pay interest <br /> No maturity date<br />Owners of the business<br />If business ceases, stockholders might not get the full capital back<br />Might receive dividend. <br />
  27. 27. Lecture 4: Stockholders’ Equity <br />[Debt and Equity financing]<br />Answer: <br />Long term liabilities comes with heavy burden <br /><ul><li>Obligation to pay up principle amount by maturity date.
  28. 28. Unlike equity, debt must at some point be repaid.
  29. 29. Regular debt’s Interest Rate Vs Dividends</li></ul> Restrict the growth of the company <br /><ul><li>Larger a company’s debt-equity ratio (highly leveraged), they are consider more risky by lenders and investors.
  30. 30. Lenders  Less willing to loan funds to finance the company
  31. 31. Investors  Less confident to invest funds in the company
  32. 32. In long term, capital to finance the company is lower.
  33. 33. High cost of servicing the debts, might end up restricting the growth of the company instead. </li></li></ul><li>Q & A ! <br />

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