The net cash flow of a company is the difference between cash inflows and cash outflows. The cash flow to common and preferred stockholders indicates the ability of a company to generate cash flow from operations for distribution to its equity investors. You will need the balance sheets of two consecutive accounting periods to determine the cash flow to stockholders.
Cash Flow to Common Stockholders
Calculate Total Dividends
Compute the total dividends paid to common stockholders. This information is on the statement of retained earnings, the shareholders' equity section of the balance sheet and press releases announcing the dividend payments. For example, if a company pays $1 a share in dividends and it has 20 million shares outstanding, the total dividend payments are $20 million (20 million x $1).
Find New Common Stock Issue Value
Determine the value of the new common stock issues. First, find the differences between the ending and beginning balances in the common stock and contributed surplus accounts, which are in the shareholders' equity section of the balance sheet. Second, add these differences to find the value of the new stock issues during the period. Common stock is the par value of common shares, and contributed surplus is the difference between the market value and the par value.
For example, if the company issues 1 million common shares with a par value of $1 per share at a market price of $10 per share, the differences in the common stock and contributed surplus amounts will be $1 million (1 million x $1) and $9 million [1 million x ($10 - $1) = 1 million x $9], respectively. Therefore, the total value is $10 million ($1 million + $9 million).
Consider Ending and Beginning Balances
Compute the difference in the ending and beginning treasury stock account, which records repurchased common shares. For example, if the company buys back 100,000 shares at $10 per share, the difference in the ending and beginning treasury stock balances would be $1 million (100,000 x $10).
Complete the Cash Flow Equation
Calculate the cash flow to stockholders of common shares, which is equal to the dividend payments minus new stock issues plus repurchased shares. To conclude the cash flow equation example, the cash flow is $11 million ($20 million - $10 million + $1 million).
Cash Flow to Preferred Stockholders
Find Value of Dividends Paid
Get the value of the dividends paid to preferred stockholders. This information should be in the financial statements or in press releases declaring dividend payments.
Find New Preferred Stock Issue Value
Determine the value of new preferred stock issues, which is the difference between the ending and beginning preferred stock balances in the shareholders' equity section of the balance sheet. If the company receives a premium over par for its preferred shares or if it redeems some of these shares during the period, factor those amounts into the calculation.
Finish the Cash Flow Equation
Calculate the cash flow to preferred stockholders, which is equal to the preferred dividend payments minus new preferred stock issues.
Other Cash Flow Calculations
The cash flow to investors is the sum of the cash flows to debt holders and stockholders. The cash flow to debt holders is the interest expense minus the difference between the ending and beginning long-term debt balances. The beginning balance of the current period is the ending balance of the previous period, which you can get from the prior-period balance sheet.
- The cash flow to investors is the sum of the cash flows to debtholders and stockholders. The cash flow to debtholders is the interest expense minus the difference between the ending and beginning long-term debt balances.
- The beginning balance of the current period is the ending balance of the previous period, which you can get from the prior-period balance sheet.
Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.