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What is meant by “equity value per preferred share”?

Preferred shares rank before the common in liquidation, winding-up, or distribution of assets. This is the preferred shareholders’ legal right. When their prior claims have been met, the common shareholders are entitled to share what’s left. The two ratios under this heading measure the asset coverage for each preferred and each common share.

Rules of thumb for equity value per preferred share Equity value per preferred share (Preferred and common share capital + contributed surplus + retained earnings + foreign exchange adjustment)/Number of preferred shares outstanding If, for example, the equity value per preferred share is $890.60 this means that each preferred share is backed by $890.60 of equity in the company. If the par value of the preferred is $50, the equity backing is $890.60/$50, i.e.17.81 times, well above the required minimum of two times. (If the preferred shares were redeemable at a premium on liquidation, the premium would be added to par value in the calculation in the previous sentence, slightly reducing the coverage, e.g. a premium of $2.50 on liquidation would result in equity backing of $890.60/$52.50, i.e. 16.96 times.) As an added safeguard – besides meeting the minimum of at least two times liquidation value in each of the last five fiscal years – the equity value per preferred share should also show a stable or, preferably, a rising trend over the same period. Equity value per common share (Common share capital + contributed surplus + retained earnings + foreign exchange adjustment (less preferred dividend arrears, if any))/Number of common shares outstanding What constitutes an adequate level of equity value per common share? There’s no simple answer. Although a per-share equity (or book) value figure is sometimes used in appraising common shares, in actual practice there may be very little relationship between the equity value per common share, and the market value per common share. Equity per share is only one of many factors to be considered in judging a stock. Many shares sell for considerably less than their equity value, while others sell far in excess of their equity value. This difference between equity and market values is usually accounted for by the company’s actual or potential earning power. A company with high earning power will command a better price for its shares in the market than a company with little or no earning power, even though the shares of both companies may have the same equity vale. So no meaningful rule of thumb for an adequate book value per common share can be quoted.