Unit 4 Lesson Plan

 

Lesson 3: Preferred Stock and Common Stock Book Value

Lesson Objectives

Lesson Objective 1: How to account for preferred stock on a balance sheet

Lesson Objective 2: What is a 10-Q

Summary of this lesson

In this lesson, students learned the importance of Common Shareholder’s equity and Preferred Shareholder’s par value. In order to properly assess the value of a common shareholder’s equity we must always remember to subtract the par value of the preferred stock. Although this might be a painful process for new investors, it’s importance is paramount. If an individual is interested in investing in such a company, you would need to assess this “correct book value” for previous periods in order to reasonably assess the common share holder’s equity growth in a business.

Common Shareholder's Book Value = (Total Shareholders Equity - Total preferred stock par value) / common shares outstanding

When completing the equation above, you'll want to ensure that you account for any cumulative dividend payments that haven't been accounted for. For instance if a preferred stock is a cummulative asset, then all those dividend payments must be added to the par value. This total figure would then be subtracted from the total shareholder's equity before dividing by the common shares outstanding.

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  • C2 U1
  • C2 U4 L1
  • Certificate of Designation

    Certificate of Designation

    This is the contract that the owner of a preferred share has with the company that issued the share. The contract stipulates all the responsibilities of the company to meet it's financial obligations. It's very important to read this document in order to protect yourself from potentially bad situations.

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  • Cumulative Preferred

    Cumulative Preferred

    This type of stock requires the issuer to pay their dividend regardless of their financial condition. Although the company has the ability to defer payment, the company will ultimately make the dividend payment to the owner.

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  • Non-Cumulative Preferred

    Non-Cumulative Preferred

    This type of stock doesn't require it's holder to receive a dividend

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  • Perpetual Preferred Shares

    Perpetual Preferred Shares

    This means the preferred share has no maturity date. If they company wants to take a perpetual preferred share off the market, they need to repurchase to security from the owner.

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  • Callable Shares

    Callable Shares

    This means that the company has the ability to repurchase a share at a fair market price.

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  • Adjustable dividend rate

    Adjustable dividend rate

    This means that the preferred share will adjust up and down with a certain benchmark interest rate. Most adjustable dividends have a ceiling and floor for their absolute value.

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  • C2 U4 L2
  • Call Date

    Call Date

    This is the date that a bond or preferred share issuer can repurchase their securities on. A security with a call date cannot be redeemed earlier than the call date. This is a very important date because securities with a call date will change in value based on the length of time between the purchase date and call date.

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  • Yield to Call (YTC)

    Yield to Call (YTC)

    The yield to call is an expected return an investor would recieve if a bond or preferred share is redeemed on it's call date. If the security isn't redeemed on this date, the yield to call does not provide a good estimate of the future return on your investment.

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  • C2 U4 L3
  • 10-Q

    10-Q

    This is a quarterly report mandated by the United States federal Securities and Exchange Commission, to be filed by publicly traded corporations.

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