Payout Ratio and Book Value per Share Divac Company has developed a statement of

Question

Payout Ratio and Book Value per Share

Divac Company has developed a statement of stockholders' equity for the year 2017 as follows:

Divac’s preferred stock is $100 par, 8% stock. If the stock is liquidated or redeemed, stockholders are entitled to $120 per share. There are no dividends in arrears on the stock. The common stock has a par value of $2 per share. Assume that the common stockholders have a right to the total net income of $85,000.

Required:

1. Determine the dividend payout ratio for the common stock. Round the payout ratio to four decimal places, but enter as a percentage to two decimal places. For example, .34678 rounds to .3468 and would be entered as 34.68, indicating 34.68%.
%

2. Determine the book value per share of Divac’s common stock. Round the book value per share to two decimals.
$ per share

Preferred Stock Paid-In
Capital—
Preferred Common Stock Paid-In
Capital—
Common Retained Earnings Balance, Jan. 1 $100,000 $50,000 $400,000 $40,000 $200,000 Stock issued 100,000 10,000 Net income 85,000 Cash dividend -31,000 Stock dividend 10,000 5,000 -15,000 Balance, Dec. 31 $110,000 $55,000 $500,000 $50,000 $239,000

Explanation / Answer

SOLUTION 1: CALCULATION OF DIVIDENDS PAID:

Closing balance of Retained Earnings = $239,000

Opening balance of Retained Earnings = $200,000

Therefore, change in Retained Earnings = 239000 - 200000 = $39,000

Net Income = $85,000

Therefore, Dividends paid during the year= 85000 - 39000 = $46,000

DIVIDEND PAYOUT RATIO = DIVIDENDS PAID / NET INCOME = 46000/85000 = 0.5412 or 54.12

SOLUTION 2: CALCULATION OF TOTAL SHAREHOLDER'S EQUITY:

BOOK VALUE PER SHARE OF COMMON STOCK = 789000/100000 = $7.89

PARTICULARS AMOUNT ($) TOTAL SHARES OF COMMON STOCK ISSUED 500,000 ADD: PAID IN CAPITAL 50,000 TOTAL PAID IN CAPITAL 550,000 ADD: RETAINED EARNINGS 239,000 TOTAL SHAREHOLDER'S EQUITY 789,000

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