Book Value Per Share – Quasi Reorganization – Flashcards

Total Common stockholders equity / Ending common shares of common stock outstanding

Total OE - liquidation preference of preferred stock - preferred stock dividends in arrears

It is an alternative to bankruptcy. Retained Earnings balance becomes "0" and the shareholders and creditors approve this measure. All contributed capital must have positive numbers, absorbing retained earnings deficit and Assets must be written down to market.

Book Value per share of common stock is the portion of owners' equity that would remain for common shareholders after the preferred claim was paid, divided by the number of common shares outstanding. The preferred dividend claim must include any liquidation preference , in this case $50,000 in premium, plus the par value, plus the dividends in arrears. So if we have $1,025,000 as our value in total owner's equity, we must substract the following components: $250,000 par value of Preferred Stock, $50,000 premium on liquidation preference for the shares over par value, $25,000 in dividends in arrears. If you take this value and divided by 100,000 shares of common stock you would get a book value of share of $7.00.

If an entity reduces par value per share from $30 to $5, and the amount of shares outstanding is 10,000, that means that $250,000 would be transferred to Additional Paid In Capital and the Common Stock account would only be $50,000. This technique is used in order to absorb the deficit in Retained Earnings, thus bringing it to zero.

The purchase of treasury stock at any price decreases total O.E because treasury stock is a contra account to O.E. When the purchase price per share is less than the book value per share, the denominator decreases at a higher percentage than the numerator. That is because the amount of shares is being reduced but the value of the stock is not being completely reduced. As a consequence the book value per share increases. Example : Total O.E = $40,000 and I have 4,000 shares of C.S. I buy 200 shares for less than the book value. B.V is $10 but I pay $8 per share. So $40,000 - $1,600 = 38,400 / 3,800 shares = $10.11. Book value per share has increased.

Remember that to obtain Book Value per share all the components of O.E must be added and then the preferred liquidation value must be substracted and then divided by the amount of outstanding common shares.