What Is the Par Value of Preferred Stock?

Preferred stock represents a class of ownership in a corporation, holding a position between bonds and common stock. Investors are often drawn to its promise of fixed dividend payments. A characteristic of this security is its par value, a concept that influences the financial returns for its holders and dictates its treatment in specific corporate scenarios.

Defining Par Value

Par value is the nominal face value assigned to a share of preferred stock, stated in the company’s corporate charter. This value is fixed when the stock is issued and does not change. Historically, par value represented the minimum price at which a company could sell its shares, establishing a “legal capital” floor to protect corporate creditors, but today it serves primarily as an accounting and legal figure.

Par value is distinct from market value. The market value of a preferred stock is the price at which it trades on the open market, which fluctuates based on factors like interest rate changes, the company’s financial health, and market sentiment. Par value, in contrast, is a static number set by the issuing company, often at a round number like $25 or $100 per share, and is not an indicator of its actual worth.

The Function of Par Value in Dividends

The primary function of par value for preferred stock is its role in calculating dividend payments. Unlike common stock dividends, which can fluctuate, preferred stock dividends are typically a fixed amount. This payment is expressed as a percentage of the stock’s par value.

The annual dividend per share is determined by multiplying the stated dividend rate by the par value. For example, a share of preferred stock with a par value of $100 and a stated dividend rate of 6% has an annual dividend of $6. This amount remains constant regardless of whether the stock’s market price moves to $80 or $120.

Companies usually pay these dividends on a quarterly basis. To find the quarterly payment, the annual dividend is divided by four. In the previous example, the $6 annual dividend would result in a quarterly payment of $1.50 per share.

Par Value’s Role in Corporate Liquidation

Par value also plays a part in a corporate liquidation, such as a bankruptcy or dissolution. Preferred stockholders have a “liquidation preference,” giving them priority over common stockholders in claims on the company’s assets. This preference is tied to the par value of their shares.

In a liquidation, after a company has paid its debts to creditors, the remaining assets are distributed to shareholders. Preferred stockholders are entitled to receive the par value of their shares before any distribution is made to common stockholders. For instance, an investor holding preferred shares with a $100 par value has a claim to receive $100 per share.

This feature provides capital protection for preferred investors compared to common stockholders, who have a residual claim on what is left after other parties are paid. The liquidation preference is typically equal to the par value plus any accumulated and unpaid dividends, known as dividends in arrears.

Accounting for Preferred Stock Par Value

Par value dictates how preferred stock is recorded on a company’s balance sheet. When a corporation issues preferred stock, the transaction is recorded in the stockholders’ equity section. The funds received are split between two accounts based on the par value, in accordance with Generally Accepted Accounting Principles (GAAP).

The portion of the proceeds equal to the par value is credited to a “Preferred Stock” account. If the stock is sold for a price higher than its par value, the excess amount is recorded in an account called “Additional Paid-in Capital” (APIC). This account is sometimes called “Contributed Capital in Excess of Par.”

For example, if a company issues 1,000 shares of preferred stock with a $50 par value for $55 per share, it receives $55,000. On the balance sheet, the “Preferred Stock” account would be credited for $50,000 (1,000 shares x $50 par value). The remaining $5,000 would be credited to the “Additional Paid-in Capital” account.