Definition: 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.
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.
Example
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.
