How to Calculate Book Value per Share of Preferred Stock

When it comes to understanding the value of preferred stock, calculating the book value per share is a fundamental task that investors need to master. This metric provides a snapshot of the value of a company's preferred stock, reflecting its book value rather than market value. Unlike common stock, preferred stock often comes with fixed dividends and seniority over common stock in the event of liquidation. Therefore, knowing how to compute its book value per share helps in making informed investment decisions and comparing preferred stocks across different companies.

To calculate the book value per share of preferred stock, follow these steps:

1. Determine the Total Value of Preferred Stock: This is typically found on the company's balance sheet. It represents the total amount of preferred stock issued and outstanding. For example, if a company has issued 1 million shares of preferred stock at a par value of $100 each, the total value of preferred stock would be $100 million.

2. Subtract Any Dividends in Arrears: Preferred stock dividends that are owed but not yet paid must be subtracted from the total value. These are important because they represent additional claims on the company's assets. For instance, if there are $5 million in dividends in arrears, you would subtract this amount from the total value of the preferred stock.

3. Calculate the Total Equity Available to Preferred Shareholders: This figure is essentially the total value of the preferred stock minus any dividends in arrears. In our example, it would be $100 million - $5 million = $95 million.

4. Find the Number of Preferred Shares Outstanding: This number should also be listed on the balance sheet or in the company's financial statements. Let’s assume there are 1 million preferred shares outstanding.

5. Divide the Adjusted Value by the Number of Preferred Shares: Finally, divide the total equity available to preferred shareholders by the number of preferred shares outstanding. Using the example numbers, the book value per share would be calculated as follows:

   $\text{Book Value per Share}=\frac{\text{Total Equity Available}}{\text{Number of Preferred Shares}}$Book Value per Share=Number of Preferred SharesTotal Equity Available​ $\text{Book Value per Share}=\frac{95,000,000}{1,000,000}=95$Book Value per Share=1,000,00095,000,000​=95

   Therefore, the book value per share of the preferred stock is $95.

This calculation is crucial for investors as it helps determine if the preferred stock is undervalued or overvalued compared to its book value. It also assists in evaluating the financial health of a company and the safety of the preferred dividends.

Why This Matters: The book value per share of preferred stock is a significant metric for investors. It can be compared with the stock's market value to assess whether the stock is a good buy. If the book value per share is higher than the market value, the stock might be undervalued. Conversely, if it's lower, the stock might be overvalued. This helps in making strategic investment decisions and understanding the financial stability of a company.

Advanced Considerations: While the basic calculation is straightforward, there are advanced considerations to keep in mind. For instance, some preferred stocks have convertible features, which could impact their valuation. Additionally, the treatment of dividends in arrears can vary depending on the specific terms of the preferred stock. Therefore, always refer to the company's specific financial statements and terms of the preferred stock for the most accurate calculation.

In Conclusion: Calculating the book value per share of preferred stock involves understanding the company's balance sheet, accounting for dividends in arrears, and applying basic arithmetic. This metric is essential for evaluating the worth of preferred stock and making informed investment decisions. By mastering this calculation, investors can better navigate the complexities of preferred stock investments and optimize their portfolios.