Scotch Company’s common stock is currently selling on a stock exchange at $45 per share, and its current balance sheet shows the following stockholders’ equity section.

Preferred stock — 8% cumulative, $___ par value, 1,500 shares

authorized, issued, and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 187,500

Common stock—$___ par value, 18,000 shares

authorized, issued, and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,000

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 562,500

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,200,000

Required (Round per share amounts to cents.)

1. What is the current market value (price) of this corporation’s common stock?

2. What are the par values of the corporation’s preferred stock and its common stock?

3. If no dividends are in arrears, what are the book values per share of the preferred stock and the common stock?

4. If two years’ preferred dividends are in arrears, what are the book values per share of the preferred stock and the common stock?

5. If two years’ preferred dividends are in arrears and the preferred stock is callable at $140 per share, what are the book values per share of the preferred stock and the common stock?

6. If two years’ preferred dividends are in arrears and the board of directors declares cash dividends of $50,000, what total amount will be paid to the preferred and to the common shareholders? What is the amount of dividends per share for the common stock?

Analysis Component

7. Discuss why the book value of common stock is not always a good estimate of its market value.