Lesson 16 of 25 · 6 min
Preferred stock versus common — Oakridge against Meridian
Fifty-five cents on the preferred dollar and fifty on the common dollar are a ranking of exit, not of the issuer.
Oakridge Utility preferred carries 55 percent. Meridian Industrial common carries 50 percent. Five points separate a preferred row from a common row, and the five points are a statement about the instrument, not about which company is finer. Preferred stock sits closer to cash in a liquidation waterfall and usually moves less than the common of the same issuer, so a schedule often advances it further.
Per dollar of market value the preferred produces $0.55 of lending value and the common produces $0.50. On the March sizes that identity is easy to lose, because the sizes are not alike. Oakridge is $511,680 × 0.55 = $281,424. Meridian is $1,838,300 × 0.50 = $919,150. Meridian supplies 3.27 times the collateral from 3.59 times the wealth. The preferred is the higher rate on the smaller pile.
Swap the rates and the pile sizes stay visible. Meridian at Oakridge's 55 percent would be 1,838,300 × 0.55 = $1,011,065, which is $91,915 more than the printed $919,150. Oakridge at Meridian's 50 percent would be 511,680 × 0.50 = $255,840, which is $25,584 less than the printed $281,424. Five points on Meridian's pile is a larger dollar event than five points on Oakridge's, because the pile is 3.59 times the size.
The preferred also carries a different eligibility surface, which lesson 15 already used. A deferred preferred dividend can zero Oakridge without touching Meridian. A concentration cap written on single-name common can cut Meridian without touching Oakridge. The five-point gap is the schedule's calm-day ranking. The instruments still fail for different reasons.
A higher advance rate on a smaller holding is not a larger contribution. It is a larger contribution per dollar, which is a different sentence.
Key terms
- Preferred stock
- An equity instrument that usually sits above common in a liquidation waterfall and often carries a stated dividend.
- Common stock
- Residual equity. On this book, Meridian and Calder. Typically the lower-advance of the two equity rows.
- Per-dollar lending value
- The advance rate read as cents of collateral per dollar of market value. $0.55 on Oakridge, $0.50 on Meridian.
Worked example
Five points, two pile sizes
Oakridge $511,680 at 55 percent. Meridian $1,838,300 at 50 percent.
- Oakridge lending value
- $281,424
- Meridian lending value
- $919,150
- Meridian at 55 percent
- $1,011,065
- Oakridge at 50 percent
- $255,840
- Market-value ratio, Meridian to Oakridge
- 3.59
$511,680 × 0.55.
$1,838,300 × 0.50.
$1,838,300 × 0.55; $91,915 more.
$511,680 × 0.50; $25,584 less.
$1,838,300 ÷ $511,680.
The preferred wins per dollar. The common wins on the book, because the book is mostly common.
Check yourself
Oakridge is $511,680 at 55 percent and Meridian is $1,838,300 at 50 percent. What is each row's lending value, and what would Meridian contribute at Oakridge's rate?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.