Alright, so let's discuss a 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. 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 are preferred stockholders. If we're paying dividends, 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 going to have our total equity, and we're going to take out our preferred equity, right? So whatever belongs to the preferred stockholders, well, they're going to get that first. So we're going to 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 going to 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 going to have preferred stock. 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 are seeking to find really good value, right? If they are seeking to find companies with market prices 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?
Ratios: Book Value per Share of Common Stock: Study with Video Lessons, Practice Problems & Examples
Created using AIThe book value per share of common stock represents the historical value of equity available to common shareholders, calculated by subtracting preferred equity from total equity and dividing by the number of outstanding common shares. This ratio helps investors identify undervalued companies when market prices fall below book values. Understanding this concept is crucial for evaluating investment opportunities and assessing a company's financial health, particularly in relation to retained earnings and overall equity structure.
Ratios: Book Value per Share of Common Stock
Video transcript
MoneyCo 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?
Tougher 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?
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What is the formula for calculating the book value per share of common stock?
The formula for calculating the book value per share of common stock is:
This formula helps determine the historical value of equity available to common shareholders by subtracting the preferred equity from the total equity and dividing the result by the number of outstanding common shares.
Created using AIWhy is the book value per share of common stock important for investors?
The book value per share of common stock is important for investors because it helps identify undervalued companies. If the market price of a stock is below its book value, it may indicate a good investment opportunity. This ratio provides insight into the historical value of a company's equity, which includes retained earnings, and helps assess the company's financial health and equity structure.
Created using AIHow does the presence of preferred stock affect the calculation of book value per share of common stock?
The presence of preferred stock affects the calculation of book value per share of common stock by requiring the subtraction of preferred equity from the total equity. Preferred stockholders have the first claim on equity, so their share must be deducted before calculating the equity available to common shareholders. The formula becomes:
Created using AIWhat is the difference between book value and market value of a stock?
The book value of a stock represents its historical value on the balance sheet, calculated based on the original sale price and retained earnings. It does not account for current market conditions. In contrast, the market value of a stock is its current price on the stock market, reflecting investor perceptions and market conditions. Book value is useful for assessing a company's financial health, while market value indicates the stock's current trading price.
Created using AICan a company have a book value per share of common stock if it does not have preferred stock?
Yes, a company can have a book value per share of common stock even if it does not have preferred stock. In such cases, the total equity is entirely attributed to common shareholders. The formula simplifies to:
This means all equity is considered common equity, making the calculation straightforward.
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