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LESSON SUMMARY
This lesson teaches you how to account for preferred shares on the balance sheet. As preferred shares are another form of raising equity, the combination of common stock and preferred stock can distort the book value and thereby also your valuation and your assessment of the stability for the overall company. This video also answers the following questions:
1) How can you calculate the book value for your stock if it has issued preferred stock: As with the book value calculation for common stock, you should start your calculation with the equity. The next step is to look up the company’s 10Q and locate how much preferred stock the company has listed. By simply deducting the amount from the total equity, you find the company’s book value.
2) Where you do find the company’s 10Q: Any major financial information providers like Morningstar, Yahoo Finance, and MSN Money, has direct access to all listed companies 10Qs and other financial filings. It is required by the SEC that all listed companies provide detailed information of anything that is relevant financially to the potential stock holders, and therefore you can always retrieve the information for free.
LESSON TRANSCRIPT
ACCOUNTING FOR PREFERRED STOCK
In the 2 previous lessons, you were probably wondering how to account for common stock and preferred stock being on the same balance sheet. In some lessons from course 1, we calculated the book value of a company. Always do that whenever there are just common stocks for the company.
You need to know to understand this lesson if you’re buying common stocks – to account for the difference between common stock and preferred stock.
To demonstrate this, we will use SPG again. Go to MSN Money and type in SPG. You’ll see the common shares for Simon Property Group. Go to the common stock ticker, and to the balance sheet, because that’s where we’ll decide. We’re looking at the interim balance sheet for the first quarter of 2012. As we come forward, you’ll notice that the balance sheet is broken down into assets and into liabilities. The difference between the two is about total equity.
We get the book value of the company by taking the total equity and dividing it by the total common shares, which gives us our book value. As we look at SPG’s balance sheet, let’s assume this company has no preferred stock. It just had common stocks. We take that 6000. I suggest you do your math in Excel or anywhere easy for you. Take that 6077.91 divided by the total common stock which is 303.1. The results can be $20.5.
Now, the balance sheet shows the common shares outstanding listed at 303.1, while the total preferred shares outstanding are listed as .8. That is not being accounted for right there. That book value of $20.5 is wrong.
You need to be careful when using the numbers from search engines. When they tell you ratios and numbers, you have to double-check; especially when you’re not the one computing the balance sheet.
Here’s what MSN is showing the book value for SPG. Just so you know, Simon Property Group is a stock that I’m recommending. We use it because it has preferred shares.
THE 10-Q
We go to the financial highlights. The book value is listed as $20.5, which is exactly what we just calculated. The calculation here is wrong, and so if we look at that quickly and do not actually check the balance sheet, we would be misled as to what the book value of this company actually is.
In this case, let’s figure out the book value. Pull up what’s called the 10-Q – the quarterly report that the Simon Property Group would have to file to the Federal government to do their taxes. Go to the SEC filings and it pulls up all the documents that the SPG has. We’re looking for the 10-Q because that’s the quarterly report. This would then be the raw information. MSN has pulled it from the report to make it easy for you to view. Go to the 10-Q report. You can see it’s the formal report that they had the file on whatever they have.
If you’re investing a lot of money in individual shares, become familiar with the 10-Q report. Read all the fine print where the best information is. Pick a part of all these tips that we’re giving you. The first thing they have here is their balance sheet. The assets are listed, the total liabilities, and the equity. The equity shows how much they value their preferred stocks. Right here, the numbers are in the thousands. It’s 44.9 million. That’s what the preferred stock is listed at. We have to come into this report to find that.
To show the difference between the SEC filling report and the balance sheet that we were looking at earlier, I pulled up side by side so you can see both. The total equity listed is $6 billion. It’s all the same for the total stockholders’ equity.
Here’s where the preferred stock is listed at. The Par value for this is listed on the right side – 44.965. The balance sheet for the MSN version is 44.97. To know how much of the common share holders’ equity is, subtract that 44.97 from the figure. This shows you exactly the preferred stock that we’re looking at. In the previous lesson, they had 1 million shares initially offered. This is what they’re down to right now and the liquidation value is what they are currently listed at.
Let’s go back to our calculator. Subtract the equity of 44.97 from 6077.91 to get 6,000,000,032. At the end of the computation, it gives us $19.09 – the bottom line figure. That’s the number we’re looking at for the book value on the common shares of SPG. Pay attention to that, unless you want to assess the equity growth of this business for the last ten years and see how much it has grown. You would know that from doing the intrinsic value calculation. Do the computation for each year to make sure you’re measuring the equity growth properly. Some might avoid buying common shares of a company that also had preferred stock out on it. That’s something you have to consider because even though that’s about a difference of 15 cents, that could really have an impact over time.
LESSON VOCABULARY
10-Q
Quarterly information filed to the SEC about the finances of the company.
SEC
Short for U.S. Securities and Exchange Commission. Has the responsibility of enforcing and regulating laws for securities and exchange.
Financial Statements
Typically referring to the three main financial statements: Income Statement, Balance Sheet, and Cash Flow Statement. In theory, it is a denominator for all formal records of financial information files by a company.
