 Hello, and welcome to the session in which we would look at the book value per share. What is the book value per share? What's the big idea? Well, basically it's finding the price of the company based on the book value. The book value means the accounting value rather than the fair value. Each company, if it's publicly traded like Google, PepsiCo, Walmart, so on and so forth, they have a fair value price. It means a price that people buy and sell on the market. Well, guess what? There is another accounting price, and that accounting price is called the book value per share. Simply put, it's signing a stock price, but that stock price is based on the balance sheet. Now, there are a lot of issues with that, and we'll see why in a moment, but remember, the balance sheet figures are historical data. Like, for example, property, plant, and equipment, land. Nevertheless, it might give us some idea about the prospect of the company by finding that book value. Now, how to compute this stock price? That's the book value. It's pretty straightforward. Basically, we're going to take the equity section that belongs to the common stockholder, so the equity section minus any preferred stock claims. Now, the computational becomes a little bit involved when we have preferred stock claims, and this is what we will work in this session to work examples, divide by the ending number of shares, or you might see it in your textbook as common shareholder equity, which is common means no preferred. But when you say common, it means take out the preferred divided by the ending number of shares. The formula is pretty straightforward, pretty easy to compute unless you have some preferred stock claims. What could be those preferred stock claims? Well, they could be you could have cumulative preferred. We talked about this where you were where you have to take into account every year. The dividend, regardless whether they declared it or not, just like computing earnings per share, you could have dividend and arrears. Dividend and arrears when the company when the company has a cumulative preferred and they are behind behind, it means they missed one or two years. Now, what you have to do, you have to take those dividend and arrears into account in your computation. Sometimes there's a cold premium. What is a cold premium? Cold premium is when the company have the right, they have the right to call the preferred stock and usually they pay a premium a price above that. Well, if that's the case, you have to take that cold premium into account and the preferred stock could be fully participating or not fully participating. We'll work examples that's fully participating to illustrate the point. But once you grasp the basic idea about that, that you have to take out the preferred stock claims when computing the book value per share, because the book value per share is the value to the common stockholders. This is what we're computing. Now, in this example, as I'm going through the through the numbers, I will compute the book value for the preferred stock as well to give you an idea to kind of you'll be able to kind of see the full picture. What is the general rule from a business perspective about this? The general rule is this, the fair value of the stock should be higher than the book value. In other words, when you look at the company stock, the stock price that's traded on the market should be higher. Otherwise, if that's the case, the company is undervalued. What does that mean? It means if you sell the company, you'll get if you sell if you look with the company because the book value is based on the book value is based on the book value based on the accounting figures based on the balance sheet figures. So in other words, if if the book value is higher, look with the company and the shareholders are better off. So generally speaking, generally speaking, fair value should be higher. Or if the fair value is not higher, the company is extremely risky. It means for some reason, no one likes this company. That's why the fair value, no one is buying their stock. And I will show you an example in the real world about both where the company had low book value and high book value. So otherwise, you are better off liquidating the company. And the best way is to show you a few companies, a few samples, few real time book value and discuss them just to get to look at the big picture. The first company I'm going to I'm going to look at is Apple, which is traded trading right now. The fair value of the stock price based on the closing 176.28. Again, when you're looking at this, it might have a different number. No, finance Yahoo will give you the book value per for any company you are looking for. So the book value per share is $3.84. What does that mean? It means if you if you look at the balance sheet of Apple, their cash, their whatever assets they have, intangible assets, goodwill, minus their liability, you come with their equity and you take their equity and you divide it to the common shareholders. The company is worth a little bit less than $4. The company is worth actually 176. So if we take 176.28 divided by $3.84, it means Apple is straight is trading approximately 46 time its book value. What does that mean? It means Apple value not from its asset. Apple value is from its earnings because it earns a lot of it earns a lot of profit. And that's why so the assets so the balance sheet is is really meaningless when you look at Apple. What matters? It's what come what people are paying what investors are paying is for their potential potential profit. Now, I'm going to compare and contrast Apple. Again, they're not comparable, but I'm trying to give you a different book value to get to the point. A company like Bank of America Bank of America stock price is $44. If we look at their book value, their book value is $30 and 22 cents. So if we take $44.42 divided by $30 and some odd change, Bank of America is only trading at one little bit less than one and a half times its book value. So it's traded at one and a half time. At some point, Bank of America book value at some point was higher than the fair value. This was an exception because of the financial crisis. They had a lot of those collateralized mortgage debt, which there were bad assets. So it was reverse, which is unusual. So the point is a company like Bank of America, it's totally different than Apple. Why? Because if you look with their assets today, you can get $30. But but the stock price is traded at $44. Now, frankly, if you look with their assets, they will not even get $30 because they still have those. Bad debt, those bad investments and bonds. But that's a different story. I'm going to look at one more one more company like normal. It's not like Bank of America. It's not Apple, something in between. And that's Darden. That's Darden Company, which is the rest. It's Darden. Let me just put it up. Darden Restaurants, it owns a few other companies. If you don't know what this company is, let me take a look at their profile. It's good to see. Good job, Adam. You would see what they do. Just so it gives you an idea. They own the Olive Garden. They own Longhorn Steakhouse. So just so it's good to know what the company is in the business. So they own many restaurant chain. So so let's take a look at their book value, their trading at $146.11. And if we look at their book value, let me scroll down. Their book value is almost $20. OK, so if we're looking at 146 divided by 20, a rough estimate. Their trading at $7.3. Again, the reason I said this is a rough estimate because the price could change tomorrow and this could change. So their trading at $7.5, their book value. That could be normal. That could be the normal thing for restaurants. So for a restaurant, when you value a restaurant, you look at their book value, you multiply it by $7.3. Now, then you can go ahead and make decisions. Look at competitors to Darden restaurant and see if that that that relationship stand seven and a half times their book value. So this is how the how the book value is used in real world. So from a financial perspective, from an analyst perspective, of course, the book value is looked at when evaluating a company. Let's go back here and start to look at actual computation. We're going to be using this Adam company and they have capital stock. They have common stock preferred stock. They have retained earnings. We're going to try to compute the book value under several scenarios, starting with a simple scenario to illustrate the point. Then we'll make the example a little bit more challenging. Before we proceed, I would like to remind you whether you are an accounting student or a CPA candidate to take a look at my website, farhatlectures.com. My motto is saving CPA candidates and accounting student one at a time. I believe accounting students and CPA candidates, they're the same thing. They're going through the same thing. I provide you additional resources, lectures, multiple choice, true, false, exercises that's going to help you do better on your exam. I don't replace your CPA review course. On the contrary, you need a CPA review course. I'm a useful addition. I can help you learn the material better. If not for anything, take a look at my website to find out how well your university is doing on the CPA exam. This is a list of all my course catalog, which I have on my website that you can check out, including lectures, multiple choice, and true, false. My CPA supplemental resources are aligned with your CPA review course, whether it's Becker, Roger, Wiley, or Gleam. I give you access to 1,500 previously released AICPA questions with detailed solution. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation, like this recording, share it with other, connect with me on Instagram, Facebook, Twitter, and Reddit. So let's start to compute the book value per share for this sample company. First, you have to understand how to read the statements of stockholders equity. So this is only a partial balance. This is only the stockholders' equity. So for this company, we have preferred stock, we have common stock. The preferred stock is $50 per share. It's 8% for this example here, non cumulative, non participating, keeping it simple. They have 5,000 authorized, of which 3,000 issued an outstanding. Well, if it's 3,000 issued an outstanding, we're gonna be paying the dividend to only those 3,000 shares. And notice, if we take the power value times the 3,000 will give us 150. Common stock, we have a common stock with a power value of $10. 50,000 shares authorized, of which 40,000 outstanding. So if we take $4 times 40,000 will give us 400,000. So this is 550 is total capital stock and we have additional paid in capital for the preferred 40, for the common 100, 140. So this is total paid in capital. We have retained earnings of 150 and stockholders' equity of 840,000. So what we're gonna do is this. Remember, we have stockholders' equity of 840,000. This stockholders' equity, because we have preferred stock, we have to back out the preferred stock, whatever belong to the preferred stock and what's left belongs to the common. Whatever's left belongs to the common, we're gonna take it and divide it by 40,000 shares to come up with the book value. So let's do this. Let me just show you the number so it's easy to look at it. And here we're gonna assume it. Again, we said it's non cumulative. We'll talk about this in a moment. So what belongs of the 840,000? This belongs to the preferred 150 and this belongs to the preferred. So what belongs to the preferred is 190 and the remainder belongs to the common. What belongs to the common is 650,000. We're gonna take 650,000 divided by 40,000 shares to book value per share for the common is $16.25. If we take 190,000, what belongs to the preferred divided by the number of shares for the preferred? And this is really in the real world. You don't use this a lot. I'm just giving you the example to kind of tell you that you could also compute the book value for the preferred. But the problem with the preferred in the real world, you have many types of, many different types of preferred. That's why you can't do that unless the company has only one type of preferred. So the book value of the preferred $63.33. I'm gonna be using the same sets of data in working different scenarios. So bear in mind the total equity should be 840,000. So always check yourself that this is equal 840 and how you split it between preferred and common. Let's change the example a little bit. Just a minor change. In this minor change, we're gonna make the preferred cumulative. When the preferred is cumulative, you have to take into account the dividend, whether it's declared or not. Because once it's cumulative, it's you are responsible for it. So it's a good idea now to practice how to compute the dividend for the preferred. How do we compute the dividend for the preferred? We'll take the par value times the rate. So each preferred share gets $4 per share in dividend. We have $4, we have 3000 shares, authorized shares issued and outstanding. So the shareholders are going, the preferred shareholders will get 12,000. So where does the dividend comes out? The dividend comes out of retained earnings. So here's what's gonna happen now. Just like the prior example, we have the preferred stock paid in capital. Now under the preferred column, we're gonna give them an additional $12,000. This additional $12,000, it's gonna come out of retained earnings. So notice retained earnings for the common went down. Now the common, the common equity is 638,000. The preferred, what belongs to the preferred is 202 remember to always add them up. They'll add up to 800 and should add up to 840. Now the common book value of the common stock is $15.95 lower than the previous one. The previous computation, the book value for the preferred 6,733 actually higher than the previous one. Now let's change the scenario a little bit and assume that the preferred stock is cumulative and it's two years in a year. It means they owe the shareholders two years. What does that mean? Every year remember, we have to pay the shareholders 12,000 because it's a cumulative. If we don't pay it, we owe it to them. Now if we are two years behind, we owe them 24,000 and this year we owe them 12, so we owe them 36. Now when we do the computation, we're gonna give the preferred column 36,000. So we're gonna reduce retained earnings from 150 to 114 and it goes to the preferred. Now if we add up what belongs to the common, 614,000. The book value is $15.35. What belongs to the preferred 226 divided by 3000 shares, the book value is $75.33. Let's change the scenario again and let's assume the company is paying $50,000 in dividend and let's assume the preferred dividend is fully participating. Fully participating means the preferred dividend, they don't only get 8%, they're gonna get 8%, the common shareholder will get 8% and whatever is left, they both have to participate in the profit and we talked about fully participating when we talked about the preferred stock, if you wanna go back and see the preferred stock session, but here we are actually showing an example about fully participating. Now I could also make it more complicated, I can tell you it's fully participating and we have two years or three years behind or something like that, but I'm gonna keep it simple, it wants you understand the concept, you will get it. So what's gonna happen is this, first we always the preferred get their money first. So of the 50,000 first we have to pay 12,000 to the preferred. So the first thing is now of the 50,000, 12,000 goes to the preferred. Now what's gonna happen? The common, we're gonna give the common 8%. How do we compute the common share? We're gonna take the par value times 8%, the same rate that the preferred are getting first. So $10 times 8%, the shareholders will get 80 pennies per share. There are 40,000 shares outstanding, so 32,000 will go to the common. So we're gonna give the common 32,000. 12 plus 32, 44,000. So what we did of the 50,000, of the $50,000 that the company paid, we already distributed 44,000. What's left is 6,000. If we take 6,000, 6,000, and what we're gonna do with the 6,000, divide the 6,000 by the par by the total capital stock for the par value of the preferred with the par value of the common will come up with the, what's called participating rate. This is how they're gonna be distributing the remaining amount at a rate of 1.0909 rounding. Now we have the rate, the participating rate, 1.0909% rounding. So what's gonna happen? We're gonna take the $400,000, what belongs to the common, the common par times that rate, and we're gonna give the common $4,363. And 60 cent of what remains. And for the preferred, we're gonna take 1.0909 times 150. And we're gonna give the preferred $2,727 and 40 cent. And now we distributed the remaining. Remember, we had 50,000 minus 44. We have 6,000 left. Now we distributed the 6,000 between the preferred and the common. Nothing's left. And always double check yourself. Make sure, add up the preferred, add up the total and they should add up to also 50,000. Now we're ready to compute the book value per share. And the book value per share is what belongs to the common is the 400, 100,000 and 135,273, which is in total 635,273. This column belongs to the preferred. Then you'll take what belongs to the common divided by the number of shares outstanding, what belongs to the preferred divided by the shares outstanding. Now also, if you wanna make this a little bit more complicated, we could also say that the preferred stock is at a premium of 105%. It means when rather than 150,000, if the company will have to buy the stock at 105%, it means you have to take 150,000 times 1.05. And this becomes, rather than 150, becomes 157,500. It means there's a cold premium for the preferred. Well, it doesn't matter if we take it from the, if we add it to the preferred, we have to take it from the common section. What you should do now is to go to farhatlectures.com and work multiple choice questions, true, false, invest in yourself. Understanding the book value per share will help you answer any questions, especially in this session, also what we learn is how to distribute the dividend. When we have preferred in common, the first goes to the preferred. So I showed you how the distribution takes place. Don't shortchange yourself. The CPA exam is worth it. Good luck, study hard and stay safe.