Question

Using Problem 1, how much is the book value per ordinary share assuming the preference shares are also
participating? *

Transcribed Image Text: Problem 1: Book Value The following is the condensed balance sheet of Red Corporation as of the end of 2020. Amounts
are in millions of pesos. ASSETS LIABILITIES AND EQUITY Current 5 Current Liabilities 1. Noncurrent 15 Noncurrent Liabilities 3 20 Preference Share
Capital, P1,000 par, 8% cumulative Ordinary Share Capital, P100 par Retained Earnings ТОTAL 6 8 ТOTAL 20 Dividends were not paid out during 2019
and 2020.

Expert Solution

 Step 1
 Out of the profit earned by the business entity, some of the profit is distributed to the shareholders of the
company in the form of dividends and the remaining profit is retained by the business organization for
further growth & expansions.

Ending Retained Earning  = Beginning Retained Earning  − Dividend

 paid
 

 Step 2

Preference dividend in year 2019 =6,000,000 × 8%
=480,000
Preference dividend in year 2020 =6,000,000 × 8%
=480,000
Total preference dividend in year 2019 & 2020 =480,000  + 480,000
=960,000
Retained earning after preference dividend =Balance of retained earning  −  Preference dividend
=2,000,000 − 960,000
=1,040,000
 

 Step 3

Computation of Book value per share is as follows :
Book value per share= Average
Shareholder 's  equity
  shares   outstanding
= 9,040,000
80,000
=$113
 

Explanation:

Shareholder's equity=Ordinary share capital  + Retained earning
=8,000,000 + 1,040,000
=9,040,000
Average shares outstanding = 8,000,000
100
=80,000 shares
WA S TH IS H EL P FU L ?