 Hello everyone. In this session, we will compute the book value per share. To compute the book value per share, you need to understand the statements of stockholders' equity, because the book value per share is derived from the statements of stockholders' equity. Now on the exam, you could be giving that statement and you'll be asked to compute the book value per share, or you could be giving information that from that information, you can prepare the statements of stockholders' equity in order to compute the book value per share. So in this example, I am not giving you a complete statement. I'm giving you pieces of information, which will help you put statements of equity together, because the book value is what? The book value is how much the stock is worth based on the equity, based on the book value of the company, because how much a company is worth? If you remember the accounting equation assets equal to liabilities plus equity. So what is the equity of the company? If we rearrange the formula, equity equal to assets minus liabilities. So that's what equity is. How much is the company worth based on the books, based on the accounting record? So in this session, we will compute the book value per share. Simply put, the stock price of the company, but it's not the market stock price. It's the accounting stock price. So the accounting stock price is based on the company's equity. So let's go ahead and get started. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true false questions, as well as exercises. Go ahead, start your free trial today. No obligation, no credit card required. In order to compute the book value per share for this company, what are we giving? Well, we are giving 8% cumulative preferred stock power value of $100. We have 6,000 shares outstanding. What does that mean? It means we have 6,000 shares of preferred stock. Those shares have a power value of $100. They pay 8% their cumulative. It means they pay $8 per share and we have 6,000 shares. So these shares pay $48,000 per year for the preferred shareholders. And notice the preferred is cumulative. It means if we don't pay the shareholders the money every year, we owe them this money for the future, although this money is not a liability. The 48,000 is not a liability. Nevertheless, we still owe them 48,000 per year. So we have 600,000 of preferred stock. We have common stock, $1 power value. We have 1 million authorized share of which 850 is issued an outstanding. We have 850,000 for common stock. Now, usually the stockholders equity, it will have additional paid in capital, which we assume we don't have. And definitely it will have retained earnings, which we don't have directly. What we are giving in this example, we are giving net income for 20 06, 07, 06 and 07, 05, 06 and 07. So let's start by seeing what we need to do here. So Adam never paid any dividend because they don't have, you know, they did not make the profit. So they're not interested in paying dividend yet. So we need to compute the book value. The first thing we're going to do is we need to compute retained earnings. What is retained earnings? Well, the company incurred a loss in 20x5, incurred a loss in 20x6 together. That's a deficit of $300,000 between 05 and 06. In 07, the company made a profit of 900,000, which increased retained earnings. As a result, we have retained earnings of 600,000. Now we find out what retained earnings is because we need it. Retained earnings is part of the equity section, which is part of the book value computation. Now, for a dividend, we said it's $8, $48,000 per year, and we have to deduct three years. You might be saying why. When you compute the book value per share, if you have a preferred dividend, what you have to do is this. You're going to take total equity and from total equity, you have to deduct everything that belongs to the preferred shareholders. And whatever is left from equity is for the common shareholders. So why are we deducting three years, although the company did not pay any dividend? Well, the assumption here is this, not the assumption. Since this is a cumulative preferred, cumulative means we owe them the money. So if we want to compute what is the value per share for the common stockholders, before you know what's your value, you have to give the preferred shareholders $144,000. So let's compute now the final retained earnings. Well, we said the retained earnings is $600,000. However, we have to deduct from retained earnings $144,000. This is dividend and dividend in a year. We have two years of dividend in a year plus one year of a current dividend of three years. Therefore, we have to deduct $144,000, which is 48,000 times trade. So the retained earnings that belong to the common shareholders is $456,000. Now we are ready to see how much of equity belongs to the preferred, how much belongs to the common. And from the common, we can compute the book value per share. So the preferred shareholders, they have $600,000 worth of preferred stock. It's right here. They have $144,000 of dividend for the preferred, which is we computed here, total for the preferred is $744,000. The common shareholders, what belongs to them is the common stock, $850,000. And the remaining retained earnings, which is $456,000. In total, the common shareholder gets $1,306,000. All what we have to do now is take this number, the equity that belongs to the shareholder and divided by the number of shares issued and outstanding, which is $850,000 shares. Therefore, the book value per share is $54,000. Now, we could also compute, if you would like, to the book value for the preferred stock, $744,000 divided by $6,000 shares. And this will be the book value for the preferred stock, if you are interested. Now let's assume the same scenario, except we're going to be adding another complication to this. We're going to assume that the preferred had a cold price of $106,000. What does that mean? It means when we compute the value that goes to the preferred, here we're saying it's $100 per value. What we have to pay is $106,000. We have to pay them 106%. So how do we do this? Well, remember, the preferred gets $144,000 from two years in a year in the current year dividend. Now, what we have to do when we compute retained earnings of $600,000, of the $600,000, we have to deduct the dividend. Then we have to deduct an additional $36,000. Where is this $36,000 coming from? It's $600,000 times $1.06. So the preferred shareholders, they will get $636,000. So there's an additional $36,000 in case we liquidate. We have to pay them, we have to pay the preferred shareholders, not $100 per share. We have, there's a cold price of $106,000. When we buy it from them, we have to pay $106,000. Therefore, what's left to the common is $420,000 of retained earnings belong to the common. Let's compute now the book value. The preferred now are $636,000, the dividend in a year $144,000, the total preferred $780,000. Now again, we can take $780,000 divided by $6,000 shares to find the book value per share. The common, they have $850,000 of common. And now only $420,000 of retained earnings. Why did the retained earnings went down? Well, because we have to pay a premium to buy back the preferred shareholders. Therefore, $850,000 plus $420,000. The common is $1,270,000. Now, if we take this amount divided by the number of shares outstanding, $850,000, we know that the book value per share is $1.49, which is lower than the prior computation. And I hope this makes sense. Why is it lower than the prior computation? Because this scenario says, when you pay the preferred shareholders, you have to pay them a $6 premium per share. You have to pay them $106,000. And where do you pay this money from? Well, it comes out of retained earnings. So it's going to reduce retained earnings. Retained earnings was reduced by $36,000. The preferred stock were increased by $36,000. Therefore, the book value of the preferred stock will go up. The book value of the common stock, we saw it went from $1.54,000, I believe, let me go back, $1.54,000 to $1.49,000. And this is how you compute the book value per share. Now, you might have different scenarios, of course, other than these scenarios. You could have different scenarios. Make sure you are comfortable with the basic. And what you should do now, go to Farhat lectures, look at additional resources, MCQs, true, false, additional practice that's going to help you understand this topic. Invest in yourself, invest in your career. Computing the book value per share is an important topic on the CPA exam. Good luck, study hard. And of course, stay safe.