14. Financial Statement Analysis
Ratios: Book Value per Share of Common Stock
14. Financial Statement Analysis
Ratios: Book Value per Share of Common Stock
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Ratios: Book Value per Share of Common Stock
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Alright, So let's discuss the ratio here, the book value per share of common stock. So the name tells it all here, we're looking for the book value, per share of common stock. Remember that book value? We're talking about the historical value on the balance sheet. The balance sheet doesn't take into account market prices of the stock, it's just what it originally sold for. But remember in our equity we also have retained earnings. Right? So we've been earning money over time. Well, that money belongs to the shareholders. So remember that book value. We're talking about historical value where fair market value? Well, that's the current value of the stock on the market. So we're focused here on that book value. Okay. Now, one thing when we talk about common stock, remember that there's another class of stock called preferred stock. Some companies sell preferred stock, not many, but preferred stockholders have the first claim on equity, they need to get paid their money first. Okay. So if we're liquidating the company, the first people to get paid is preferred stockholders. If we're paying dividends out, the first people to get their dividends are preferred stockholders. Okay. And after they're paid, everything else belongs to the common stockholders. Okay. So the preferred get their share and then everything else is common. So let's look at how we do this book value, per share of common stock? Well, we're gonna have our total equity and we're gonna take out our preferred equity, right? So whatever belongs to the preferred stockholders, well, they're going to get that first? So we're gonna have all our equity minus that preferred equity. What's left over is the common equity. Okay. And remember we're talking about book value book value, we're not talking about the market value of this stuff. Okay. And in our denominator we're gonna have the number of shares outstanding, Right? Because we're looking book value per share. So our denominator is the number of shares of common stock outstanding. Cool. So sometimes we're not even gonna have preferred stock. A lot of, a lot of companies don't have preferred stock, so all the equity in that case, total equity belongs to the common. Okay? So if there's no preferred equity, well then all equity is common equity. So this ratio is showing us the book value of equity belonging to each share of stock, right? How much book value does each share own, Right? Because the book value, remember it started with whatever they put into the company for the share of stock, but then they've also been earning money over time. So that retained earnings. Well, that belongs to the common stockholders. So sometimes this might be this isn't such a common ratio, I'll tell you. But this might be important to investors when they're seeking to find really good value. Right? If they're seeking to find companies with market price, below book value. So there could be this book value of equity, but the market price is below that. Well, that could be a really good investment, right? This ratio would help them find those types of investments, right? That would be an undervalued company. So it's a pretty easy ratio to calculate why don't we just jump in and do some practice problems?
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Problem
ProblemMoneyCo had sales revenue and net income during the current year of $500,000 and $60,000, respectively. The total amount of stockholders' equity was $600,000, and common shares outstanding were 120,000 all year. If the market price of the stock is $10, what is the book value per share of common stock?
A
$0.20
B
$0.50
C
$4.17
D
$5.00
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Problem
ProblemTougher Company's current year income statement showed an EPS of $1.25 per share. If total equity was $600,000 (40,000 common shares, $1 par), preferred dividends were $10,000 (10,000 preferred shares with $10 book value each), and the market price of common and preferred stock are $25 and $50, respectively, what is the book value per share of common stock?
A
$12.50
B
$15.00
C
$20.00
D
$25.00