When a company has both common shares and preferred shares, the book value per common share is calculated by:
A) dividing total shareholders' equity by the number of common shares outstanding
B) dividing the amount in the common shares account by the number of common shares outstanding
C) dividing total shareholders' equity less preferred equity by the number of common shares outstanding
D) dividing the amount in the common shares account by the sum of the number of common shares and preferred shares outstanding

Question

Quizplus · Accepted Answer

The book value per common share is calculated by dividing total shareholders' equity less preferred equity (since preferred shares have priority over common shares in terms of dividends and liquidation) by the number of common shares outstanding. Choice A is incorrect because it does not account for preferred shares. Choice B is incorrect because it only considers the amount in the common shares account, which may not reflect the full value of shareholders' equity. Choice D is incorrect because it includes preferred shares in the denominator, which would result in a higher book value per common share than what is accurate.

When a Company Has Both Common Shares and Preferred Shares