Book Value

Given that neither company has issued preferred stock, which firm has the larger book value per share?

Book value per share = (Equity - Preferred Stock)/ Common Shares Outstanding

Since the basic accounting equation says that Assets = Liabilities + Owner Equity, Equity = Assets - Liabilities.

We're told there is no preferred stock. Common Shares Outstanding will be either zero or a positive number. Given that there's no answer option of "not enough information" or "none of the above," we can safely assume that common stock has been issued; i.e. that the denominator will be a positive number.

(a) Company B since it has a net income of $70,000.

Net income does not factor into book value. Furthermore, Company B's assets total $210K and liabilities total $440K.

$210K - $440K = -$230K showing negative equity and therefore a negative book value

(b) Company A.

Assets - Liabilities = $110K - $4K = $107K showing positive equity and therefore a positive book value

(c) Company B since it has $115,000 in total assets.

Not true.

(d) Company B.

As established in (a), Company B's book value is negative while, as established in (b), Company A's book value is positive and therefore greater.

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License