Corporate Financial Accounting Study Set 3
Quiz 12 :
Earnings per share: This refers to the earning or the return which a shareholder gets on his share i.e. on the investment made. a.Calculation of Earnings per Share: Income/Loss from business is the earnings for Equity Shareholders after payment made to Preferred Shareholders. As there is no Preferred Stock, So Total Income/Loss will be the Earning for Equity Shareholders. B. W Company is more profitable from the Earning per Share perspective. As Calculated in the above step, Company W Equity Shareholders gets $5.07 per share profit. On the other hand in Company A, equity Shareholders bear $0.5216 loss per share. C. Earnings per share are calculated on actual profit basis, while market price of share depends on various factors e.g. estimates of future profitability, company's ability to earn the profit etc.In this case company W has $72 per share market price which is less than from the market price of company A's share i.e. $437. This is because company A focuses only on Internet business which is profitability approach as in coming time Traditional market will not have much market share. On the other hand company W focuses on Internet Market as well as Traditional Market so it would seem less profitable than Company A in coming future. Therefore Market Price of company A is higher instead of loss per share.
Common stock provides the investor, with share in ownership of the company. Par value (PV) is amount per share appearing on stock certificates. It is useful for computing value of a corporation's stock for balance sheet purposes and for determining market values, payment of interest, returns and premiums. In order to compute shareholder's equity applicable to common stock, value of preferred stock has to be deducted from value of equity. The resultant is divided by number of common stock outstanding in order to find book value/share (BV). First of all, determine dividend on preference shares is computed as follows: Thus, preference dividend for all three years will be $640. Dividend per share (DPS) is defined as amount of dividend which a stockholder is entitled to receive for each share held. It is computed by dividing amount of dividend paid with number of shares outstanding. It is computed as follows: Determine amount of dividend available for common stockholders (CS) in first year as follows: Thus, an amount of is available for common stockholders in first year. Calculate dividend available for common stockholders (CS) in second year as follows: Thus, an amount of is available for common stockholders in second year. Calculate dividend payable to common stockholders (CS) in third year as follows: Thus, an amount of is available for common stockholders in third year.
Investment decision making: When the funds are to be invested by the prospective investors, then it is required to analyze the return from the investment to be made in terms of the current income. If the return from the proposal is more than the current income, the investment will be made otherwise reject the proposal. Par value of share does not provide any indication about the stock that which one is preferable for investment purpose. It is not correct to state that common stock with higher par value is better than common stock with lower par value common stock. For example: Two companies are issuing common stock. First company has issued 100 shares with par value of $10 and second company has issued 10 shares with par value of $100. The resultant value of common stock will be $1,000, whether issued by first company or second company. It shows it will not impact the decision related to investment.