Investors use the value per share of common equity when evaluating a company's performance. Firms must list this value, also known as earnings per share (EPS), on earnings statements, and companies also use it when calculating shareholders' dividends. The implied value per share depends on the number of outstanding shares and the net earnings available to shareholders. This latter value is less than the company's net income, because firms owe a fixed value from their earnings to preferred shareholders.
1. Calculate the value of the company's preferred dividends. For example, if preferred shareholders own 10,000 shares, and the company has promised fixed dividends of $12 per share, the formula for preferred dividends would be: 10,000 × 12 = $120,000.
2. Subtract the company's preferred dividends from its net income. For example, if the company has a net income of $700,000: $700,000 - $120,000 = $580,000.
3. Divide this adjusted net income by the number of outstanding common shares. For example, if investors own 60,000 common shares: $580,000 ÷ 60,000 = $9.67. This is the implied value per share of the company's common equity.
- "Cornerstones of Financial & Managerial Accounting..."; Jay S. Rich et. al.; 2009
- "Principles of Accounting"; Belverd E. Needles; 2010
- "Financial and Managerial Accounting"; Carl S. Warren et. al.; 2008
- Jacksonville State University: Dividend Transactions