Book value per share is the net assets available to common stockholders divided by the shares outstanding, where net assets represent stockholders’ equity less preferred stock. Book value per share tells what each share is worth per the books based on historical cost.

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Investors need to know book value per share of a company before attempting to invest in there. A comparison of book value per share with market price per share gives an indication of how the stock market views the company. “So, how to compute it?” you may be curious.

It is okay to not knowing it as you might not been an investor, just yet? But gaining more knowledge is always a good step to upgrade your skill. That is the purpose of this simple website—to learn something and grow. Through this post I am going to show you how to compute book vale per share of companies, step-by-step. Read on…

 

How Is ‘Book Value Per Share’ Computed?

First of all, you probably knew already that there are two types of share in a company, they are: (1) preferred stock; and (2) common stock. Each type of stock is computed differently. Here is the formula of each:

1. Book Value Per Share for Preferred Stock:

(Liquidation Value of Preferred Stock + Preferred Dividend in Arrears) / Preferred Shares Outstanding

2. Book Value Per Share for Common Stock:

[Total stockholder’s equity – (liquidation value of preferred stock + preferred dividends in arrears)]/ Common shares outstanding

Note: When you attempt to compute the ‘Liquidation Value of Preferred Stock’, you should realize that some companies have preferred stock issues outstanding that give the right to significant liquidation premiums, which may substantially exceed the par value of such shares. The effect of such liquidation premiums on the book value of common stock can be quite material.

Next let’s go with an easy case example.

 

Book Value Per Share Computation Example

Here are Lie Dharma Putra’s financial information:

  • Total stockholders’ equity = $4,000,000
  • Preferred stock, 6% dividend rate, 100,000 shares, $10 par value, $12 liquidation value
  • Common stock, 200,000 shares, $20 par value
  • Preferred dividends in arrears for 3 years

So what is book value per share of each Lie Dharma Putra’s preferred and common stock?

Back to the formula. To enable you to compute ‘Book Value Per Share’ of each type of stock, first you would need the following information on hand:

(1)Total stockholder’s equity – You have it = $4,000,000

(2) Liquidation Value of Preferred Stock – You need to compute it first. The formula is: share x liquidation value = 100,000 shares × $12 = $1,200,000. There you have it.

(3) Preferred Dividend in Arrears (or reminder) – You need to compute it first. Here is how:

Par value of preferred stock, 100,000 × $10 = $1,000,000
Preferred dividend rate                                                                × 6%
Preferred dividend per year                                   = $       60,000
Number of years                                                                                 × 3
Preferred dividend in arrears                                = $     180,000

There you have it.

(4) Preferred Shares Outstanding – You have it = 100,000 shares

(5) Common shares outstanding – You have it = 200,000 shares

So, now you have everything on hand. Next you can start computing ‘Book Value Per Share’ of each type of stock using the formula. Here you go:

1. Book Value Per Share for Preferred Stock:

(Liquidation Value of Preferred Stock + Preferred Dividend in Arrears) / Preferred Shares Outstanding

($1,200,000 + 180,000)/ 100,000 shares = 1,380,000 / 100,000 = $13.80

2. Book Value Per Share for Common Stock:

[Total stockholder’s equity – (liquidation value of preferred stock + preferred dividends in arrears)]/ Common shares outstanding

($4,000,000 – 1,380,000)/ 200,000 shares = 2,620,000 / 200,000 = $13.10

Generally, for your information, market price per share should be higher than book value per share, because the former is based on current prices. For example, if a company’s market price per share of stock is currently $20 and the book value per share is $26, the stock is probably not favored by investors.

Also note that an acquiring company may pay a market price less than the liquidation value (breakup value) for an acquired company in order to obtain a profit by liquidating the acquired business.