Calculating Book Value per Share and Understanding It

Book Value per Share

A4 Compute book value and explain its use in analysis.

Case 1: Common Stock (Only) Outstanding. Book value per common share Recorded amount of equity applicable to common shares divided by the number of common shares outstanding., defined in Exhibit 13.21, reflects the amount of equity applicable to common shares on a per share basis. To illustrate, we use Dillon Snowboards’ data from Exhibit 13.4. Dillon has 30,000 outstanding common shares, and the stockholders’ equity applicable to common shares is $365,000. Dillon’s book value per common share is $12.17, computed as $365,000 divided by 30,000 shares.

EXHIBIT 13.21 Book Value per Common Share

Point: Book value per share is also referred to as stockholders’ claim to assets on a per share basis.

Case 2: Common and Preferred Stock Outstanding. To compute book value when both common and preferred shares are outstanding, we allocate total equity between the two types of shares. The book value per preferred shareEquity applicable to preferred shares (equals its call price [or par value if it is not callable] plus any cumulative dividends in arrears) divided by the number of preferred shares outstanding. is computed first; its computation is shown in Exhibit 13.22.

EXHIBIT 13.22 Book Value per Preferred Share

The equity applicable to preferred shares equals the preferred share’s call price (or par value if the preferred is not callable) plus any cumulative dividends in arrears. The remaining equity is the portion applicable to common shares. To illustrate, consider LTD’s equity in Exhibit 13.23. Its preferred stock is callable at $108 per share, and two years of cumulative preferred dividends are in arrears.
 

EXHIBIT 13.23 Stockholders’ Equity with Preferred and Common Stock

The book value computations are in Exhibit 13.24. Equity is first allocated to preferred shares before the book value of common shares is computed.

EXHIBIT 13.24 Computing Book Value per Preferred and Common Share

Book value per share reflects the value per share if a company is liquidated at balance sheet amounts. Book value is also the starting point in many stock valuation models, merger negotiations, price setting for public utilities, and loan contracts. The main limitation in using book value is the potential difference between recorded value and market value for assets and liabilities. Investors often adjust their analysis for estimates of these differences.

A corporation can be classified as having either a simple or complex capital structure. The term simple capital structure Capital structure that consists of only common stock and nonconvertible preferred stock; consists of no dilutive securities. refers to a company with only common stock and nonconvertible preferred stock outstanding.

The term complex capital structureCapital structure that includes outstanding rights or options to purchase common stock, or securities that are convertible into common stock. refers to companies with dilutive securities.  

Dilutive securities  
Securities having the potential to increase common shares outstanding; examples are options, rights, convertible bonds, and convertible preferred stock. include options, rights to purchase common stock, and any bonds or preferred stock that are convertible into common stock. A company with a complex capital structure must often report two EPS figures: basic and diluted.  

Diluted earnings per share 
Earnings per share calculation that requires dilutive securities be added to the denominator of the basic EPS calculation. is computed by adding all dilutive securities to the denominator of the basic EPS computation. It reflects the decrease in basic EPS assuming that all dilutive securities are converted into common shares.