# How to Calculate The Cost of a Newly Issued Preferred Stock

by Ryan Menezes

Companies issue two types of stock. Common stock gives investors voting rights on corporate policy and hiring decisions, and it offers dividends proportional to the company's net income. Preferred stock includes no voting shares, but it pays fixed dividends that precede payments to common shareholders. Offerings of either stock bring new equity to the company. A company must set the price of a new preferred stock offering according to the level of equity it seeks to generate.

1. Multiply the number of common shares that the company has issued through its prior offerings by the common shares' original stock price. For example, if the company issued 15,000 shares at \$40 each, multiply 15,000 by \$40 to give \$600,000, the company's equity level.

2. Subtract the current equity level from the company's target level. For example, if the company wants a total of \$800,000 in equity, subtract \$600,000 from \$800,000 to get \$200,000.

3. Subtract the current number of shares from the total number of shares the company wishes to leave outstanding. For example, if the company wants a total of 19,000 outstanding shares, subtract 15,000 from 19,000 to get 4,000.

4. Divide the amount of new equity the company must generate by the number of preferred shares it will issue. Continuing this example, divide \$200,000 by 4,000 to get \$50. This is the cost it must set for its newly issued preferred stock.

#### References

• Cornerstones of Financial & Managerial Accounting...; Jay S. Rich et. al.; 2009
• Principles of Accounting; Belverd E. Needles; 2010