Book Value Of Stockholders Equity
2012
How I Made $304,200 In Twenty Four Hours!
Provident Savings Bank was set up in 1839. Prudent is a rewarding bank and has accumulated over $300 million bucks in retained takings since its founding. Prudent is a mutual savings bank. Mutual savings banks are owned communally by their depositors. Provident’s revenues have been amassing for many years but cannot be accessed by the depositors. Prudent Bank made a decision to convert to stock ownership and sell shares of stock in the bank to its depositors. The stockholders of the stock own all of the equity or net worth of the bank including the retained revenues that have been building up for a number of years.
Prudent sold stock to its depositors at about 65% of book value. Book value is figured out by subtracting the debt of the bank from the assets of the bank (including the retained takings). Book value for many banks is generally money (retained takings plus the cash received from the IPO). So the depositors buying the Prudent stock in the IPO are largely purchasing the net worth of the bank for 65 cents on the dollar.
The IPO stock price was $10 per share. If the stock is coming out at 65% of book price then the book value is about 15.38 per share (15.38 x .65 = 10.00). If the stock trades up to book worth at 15.38 then there'll be a 53.8% return for depositors who purchased the stock at $10 (15.38 minus 10.00 cost = 5.38 gain divided by 10.00 cost = 53.8% return).
Provident Bank converted from a mutual bank to stock ownership and offered depositors of the bank to get shares in the conversion IPO at $10 per share. As a depositor at Prudent Bank, I received notice by mail of the imminent conversion and a stock order form which permitted me to purchase stocks in the conversion at the favorable IPO cost of $10. I completed the stock order form and returned it to the bank along with a check to get the stock.
As a depositor at Provident Bank, I was in a position to purchase 52,000 shares of Provident Bank at $10 per share. I received a stock certificate from the bank (see copy of stock certificate that follows). I deposited the 52,000 shares of Provident Bank in my brokerage account.
On the IPO date shares of Prudent Bank started trading on the stock exchange. On the first day of trading, shares of Provident Bank closed at 15.85. Buying the shares at $10 produced a $5.85 profit per share on the IPO date (current cost of $15.85 “purchase price of $10 = profit of $5.85). I had 52,000 shares of Prudent Bank which produced a total open trade profit of $304,200 on the IPO date. Not bad for a day’s work!
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