Why aren't preference shares included in market cap calculations?
And as a result you need to add them back in to get EV..?
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Market Cap is just what a company would cost you if you bought all the common shares.
Enterprise Value is how much it would actually cost in real terms to buy a company.
EV = Market Cap + Debt + Pref Shares - Cash
Because they are not common shares.
Preferred shares are not included in your standard market cap calculation because their characteristics are more like debt, thus equity value to common shareholders is reduced by amounts owed to preferred shareholders. With publicly traded companies, preferred shareholders are essentially debtholders entitled to a periodic (generally annual) interest payment equal to the par value of the preferred shares multiplied by a pre-stated "preferred dividend" percentage, determined at issuance. For instance, if I hold Series A Preferred shares in XYZ Company and I bought them at $100 per share with an 8% cumulative annual dividend, I am entitled to $8 from the company every year. Very similar to an 8% annual coupon rate (interest) on bonds with a face value of $100...
To get EV, treat preferred shares just like you would debt. Add back the market value of the preferred shares outstanding, not the book value. So:
Enterprise Value = Market Cap + Debt + Preferred Shares Outstanding - Cash & Cash Equivalents
No par value preference shares (Originally Posted: 03/31/2015)
Am I right in thinking that NO PAR VALUE pref stock can be thought of as common stock just with different rights?
Question comes from looking at Vale SA - they incl. pref stock in market cap calculation and so do all the service - Bloomberg, Thomson etc
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