Question

Enscoe Enterprises, Inc. (EEI) has 220,000 shares authorized, 180,000 shares issued, and 20,000 shares of treasury stock. At this point, EEI has $880,000 of assets. $240,000 liabilities, $400,000 of common stock, and $240,000 of retained earnings. Further, assume that the market value of EEI's common stock is $6 per share.Required:a. Determine the number of shares of stock that is outstanding. b. Determine the book value per share. e. Provide a rational explanation for the difference between the book value per share and the market value per share of Mrs common stock.

Answer 1

Answer:

Enscoe Enterprises, Inc. (EEI):

a) Number of shares of stock outstanding is 160,000 shares (180,000 minus 20,000).

b) The book value per share = (value of common stock plus retained earnings) divided by outstanding shares

= $(400,000+ 240,000)/160,000 =  $640,000/160,000 = $4 per share

c) The book value per share represents how the equity shares are valued in the company's accounting records.  This may not be similar to the market value per share.  The market value per share is determined by market sentiments, which cannot be historically accounted for as the book value is.

The book value per share can be compared to the market value per share to determine if a stock is overvalued or undervalued.

At liquidation, the book value per share represents what each shareholder would get if all the assets are sold and liabilities liquidated.  But, the market value per share is what the investor gets if she sells the stock in the market without waiting for the company to be liquidated.

Explanation:

a) Treasury Stock is a contra account to the Common Stock.  When stock is repurchased it reduces the issued shares by the number.  It is only the outstanding stock that has equity interest in the entity.

b) The book value per value is the net worth of the company divided by the number of outstanding shares.  It shows the net assets value per share.  The net assets are the total assets minus the total liabilities.  It is the same thing as Equity or the interests of equity stockholders in the company.