## Book Value Of Bonds And Stocks

The balance sheet of a company having bonds, pre-ierred and common stocks, might be as follows:

Fixed Property ยง1,000,000 7% Pfd, Stock

Current Assets 500,000 *Common Stock

1 st Mortgage 6%

Bonds 500,000

Cur. Liabilities 200,000

Surplus 100,000

* 17,000 shares

To find the net book value (net tangible asset value) of the bonds you would add the figure for the bonds, plus the figures for the preferred stock, common stock and surplus, and from this total of \$1,800,000, deduct the \$500,000 good-will, leaving \$1,300,000 of net tangible assets applicable to the \$500,000 of bonds. Thus each \$1,000 bond would have a net book value of \$2,600.

To find the net book value of the preferred stock, the bonds are excluded and only the figures for the preferred,, common and surplus are added and the good-will deducted as before, leaving \$800,000 of net tangible assets applicable to the 6,000 shares of preferred stock, or \$133.33 a share net book value.

The first step in finding the net book value of the common stock in a case where there is a preferred stock, is to look up the liquidating value of the preferred stock. Frequently preferred stock is entitled to more than par in liquidation (or dissolution) and, of course, in tie case of no par stock it is necessary to look up the liquidating value anyway. In this particular case the preferred stock has a liquidating value of \$105, or a total \$630,000. Next find the net tangible assets applicable to the preferred stock, \$800,000 as above, and from this deduct the total liquidating value of the preferred stock, \$630,000. The remaining amount, \$170,000, is the net tangible assets applicable to the 17,000 shares of no par common stock, or \$10 a share net book value.

If there are accumulated dividends on the preferred stock, these must also be deducted in calculating the book value of the common (or of a junior preferred issue). Sometimes allowance must be made for participating features of a preferred or Class A stock.

Sometimes, also, the value in case of dissolution is not representative of the claim on earnings, and it is better to value the preferred stock at some figure which fairly reflects its dividend rate. (This may be called its "effective par value.") For example, under present conditions, an \$8 non-callable preferred stock, even though entitled to only \$100 a share in case of dissolution, might properly be deducted at a 5% basis, or \$160 a share, in order to determine the balance of assets available for the common stock.

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