What is Book Value per Preferred Share?
Preferred shares have the qualities of stocks and bonds, which makes their valuation a little different than common shares. The owners of preferred shares are part owners of the company in proportion to the held stocks, just like common shareholders.
Preferred shares are hybrid securities that combine some of the features of common stock with that of corporate bonds.
The book value per preferred share is a financial ratio that calculates amount of equity applicable to each outstanding preferred stock. In other words, this is the equity value of each preferred stock outstanding.
When you own preferred stock in a company, you get dibs on dividends before common stock owners, and you get paid before them if the company sells off, or liquidates, its assets. A preferred stock’s book value per share represents the amount the company would pay out per share if it liquidates. Although you buy and sell preferred stock at the market price — which typically differs from book value — it’s a good idea to know its book value as a reference point, as shares that sell for steeply lower than book value might indicate financial trouble.
What Does Book Value per Share Mean?
Computing the book value of preferred stock is slightly different than computing common stock’s value because preferred shares include options that commons shares don’t. For example, many preferred shares are callable at a specific price. This means the corporation could buy back the shares at certain times for the agreed upon price. Also, preferred shareholders often have an accumulated amount of dividends in arrears that they are entitled. Both of these options are taken into consideration in the book value equation.
Unique Features of Preferred Shares
Preferred shares differ from common shares in that they have a preferential claim on the assets of the company. That means in the event of a bankruptcy, the preferred shareholders get paid before common shareholders.
In addition, preferred shareholders receive a fixed payment that’s similar to a bond issued by the company. The payment is in the form of a quarterly, monthly, or yearly dividend, depending on the company’s policy, and is the basis of the valuation method for a preferred share.
Generally, the dividend is fixed as a percentage of the share price or a dollar amount. This is usually a steady, predictable stream of income.
The book value per preferred share is calculated by dividing the call price or par valueplus the cumulative dividends in arrears by the number of outstanding preferred shares. In other words, divide the applicable equity by the number of shares. This will give you the amount of net assets that each preferred share owns or has the rights to.
Book value per share is often used to negotiate mergers, acquisitions, and loan contracts. During a merger, the both companies need to calculate a baseline price for the common and preferred shares of the business being absorbed. Book value is a good starting point because it is objective and shows a selling price or liquation value of the shares.
Keep in mind that this is just starting point. Shares can’t possibly be measured using book value alone. What about the difference between book value and market value? Some assets on the balance sheet are recorded at costs that don’t truly reflect their fair market value. For instance, a building that was purchased 30 years ago is probably worth more today than it was on the original purchase date. This valuation is just a starting point.
How to Calculate the Book Value of a Preferred Stock
Identify the preferred stock’s call price plus any dividends in arrears. The call price is the price the corporation must pay investors for the preferred stock if it decides the repurchase it. You may do this by going to Yahoo! Finance and typing the stock’s ticker symbol in the search box. This information is found on the company’s balance sheet. The balance sheet may be obtained through your broker or from the corporation’s website. The book value of a share of preferred stock is it’s call price plus any dividends in arrears.
Do the math. If a 5 percent cumulative preferred stock having a par value of $100 a share has a call price of $110 a share and the corporation owes two years of dividends, the book value of the preferred stock is $120 per share. For example: $100 par value + $10 premium + $10 for two years of dividends in arrears = $120.
Calculate the total book value of a corporation’s preferred stock by multiplying the book value of each share by the total number of shares outstanding. For example, if the book value of the company’s preferred stock is $120 per share and there are 1 million outstanding shares, the total book value of the company’s preferred shares is $120 million.