Book Value of Equity Formula

The book value of equity is simply the difference between the total assets of a business and its total liabilities. Using the accounting equation the book value of equity formula can be stated as follows.

Equity = Assets – Liabilities

Book Value of Stockholders Equity

For a corporation the book value of stockholders equity is normally calculated on a per share basis. Suppose the following is an extract from the equity side of the balance sheet of a business.

Extracts from the Balance Sheet
…..
Shareholder’s Equity
Common stock 300
Additional paid in capital – Common stock 29,700
Paid in capital 30,000
Retained earnings 19,500
Total equity 49,500
…..

From the balance sheet extract we can see that the total book value of common equity is 49,500. If the business has a total of 3,000 shares of common stock in issue then the book value of equity per share of common stock is calculated as follows.

Book value of common stock = 49,500
Number of shares of common stock in issue 3,000
Book value of equity per share = 49,500 / 3,000 = 16.50

Book Value of Preferred Stock

When a business issues both common and preferred stock the calculated book value needs to be divided between the common and preferred stockholders. Since the preferred stockholders have a prior claim over the equity of the business, the book value attributed to them needs to be calculated first, any remaining book value will then belong to common stockholders.

book value of equity

Suppose the following is an extract from the equity side of the balance sheet of the business.

Extracts from the Balance Sheet
…..
Shareholder’s Equity
6% Cumulative preferred stock 25,000
Common stock 300
Additional paid in capital – Common stock 29,700
Paid in capital 55,000
Retained earnings 19,500
Total equity 74,500
…..

From the balance sheet extract we can see that the total value of equity is 74,500.

Value of Preferred Stock

The book value of preferred stock calculation will depend on the type of preferred stock issued. In this example the stock are assumed to be cumulative (meaning that any arrears of dividends must be taken into account) and callable (meaning that the call price of the share is used if this is higher that its par value).

Assume that 250 shares of preferred stock have been issued at 100.00 par value and a call price of 106.00 and that 2 years of dividends are in arrears.

The value of equity per share of preferred stock is calculated as follows.

Book value = 74,500
Dividend arrears per share = Par value x Dividend rate x Number of years
Dividend arrears per share = 100.00 x 6% x 2 = 12.00

Book value per share = Call price + Dividend arrears
Book value per share = 106.00 + 12.00 = 118.00

Book value of preferred stock =  Number of shares x Book value per share
Book value of preferred stock =  250 x 118.00 = 29,500
Book value per share = 29,500 / 250 = 118.00

The amount of equity attributable to the preferred stockholders is therefore 29,500.

Value of Common Stock

Having calculated the value attributable to shares of preferred stock, the remaining equity can now be attributed to the shares of common stock.

Book value of common stock = Book value of equity - Book value attributed to shares in preferred stock
Book value of common stock = 74,500 - 29,500 = 45,000
Number of common stock shares in issue 3,000
Book value of common stock per share = 45,000 / 3,000 = 15.00
Last modified April 9th, 2020 by Michael Brown

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.

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