How to calculate average issue price of preferred stock?

Calculating the Average Issue Price of Preferred Stock: A Simple Guide

Understanding the average issue price of preferred stock is crucial for investors and companies alike. This figure represents the average price investors paid for each share of preferred stock when it was initially issued. While seemingly straightforward, calculating this value requires a nuanced understanding of the components involved.

The core calculation revolves around two key figures: the total capital raised from the issuance and the number of shares issued. Simply divide the total capital raised by the number of shares issued to arrive at the average issue price.

The Formula:

Average Issue Price = Total Capital Raised / Number of Shares Issued

Breaking Down the Components:

• Total Capital Raised: This refers to the total amount of money the company received from selling the preferred stock. It’s important to note that this figure represents the net proceeds, meaning it should exclude any underwriting fees, legal expenses, or other costs associated with the issuance. These costs are deducted from the gross proceeds before calculating the average issue price.

• Number of Shares Issued: This is the total number of preferred shares the company sold to investors during the initial offering.

Example:

Let’s say a company issues 1,000,000 shares of preferred stock and raises $25,000,000 in net proceeds after deducting all issuance costs.

Average Issue Price = $25,000,000 / 1,000,000 shares = $25 per share

Therefore, the average issue price of the preferred stock is $25.

Why is this important?

• For Companies: Tracking the average issue price helps companies understand the market’s perception of their preferred stock and can inform future financing decisions. It also plays a role in calculating the cost of capital.

• For Investors: The average issue price provides a benchmark for comparing current market prices. It can help investors assess the potential return on investment and understand how the market values the company’s preferred stock.

Considerations and Nuances:

• Multiple Issuances: If a company has issued preferred stock multiple times at different prices, calculating a weighted average issue price might be more appropriate. This involves multiplying each issue price by the number of shares issued at that price, summing these values, and then dividing by the total number of shares outstanding.

• Stock Splits: Stock splits can impact the number of shares outstanding and therefore affect the calculation. It’s important to adjust the number of shares issued to reflect any stock splits that have occurred.

• Par Value: While par value is often printed on the stock certificate, it doesn’t directly factor into the calculation of the average issue price. Par value is primarily an accounting concept and represents the minimum legal capital a company must maintain for its preferred stock.

By understanding the components and applying the formula correctly, you can accurately calculate the average issue price of preferred stock and gain valuable insights into a company’s financial standing.