Book Value Per Share – Quasi Reorganization – Flashcards
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Reducing par value to eliminate Retained Earnings deficit
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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.
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Effects of purchases of Treasury Stock on Book value per share
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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.
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Book Value Special Note
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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.
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