Enter the invested equity/contributed capital ($) and the preferred rate (% per period, commonly annual) into the Calculator. The calculator will evaluate the simple Preferred Return for that same period.

Preferred Return Calculator

Enter any 2 values to calculate the missing variable

Preferred Return Formula

PR = E * PFR/100

Variables:

  • PR is the Preferred Return ($) for the period represented by the preferred rate
  • E is the invested equity / contributed capital ($)
  • PFR is the preferred rate (%) for the same period (often quoted annually)

To calculate the Preferred Return, multiply the invested equity by the preferred rate and divide by 100 (because the rate is entered as a percent). If your preferred rate is quoted annually but you need a different time period, adjust the rate/period according to your agreement (simple vs. compounded).

How to Calculate Preferred Return?

The following steps outline how to calculate the Preferred Return.

  1. First, determine the invested equity / contributed capital ($). 
  2. Next, determine the preferred rate (%) for the period you are calculating. 
  3. Next, gather the formula from above = PR = E * PFR/100.
  4. Finally, calculate the Preferred Return.
  5. After inserting the variables and calculating the result, check your answer with the calculator above.

Example Problem : 

Use the following variables as an example problem to test your knowledge.

invested equity ($) = 100,000

preferred rate (%) = 5

Preferred return ($) = 100,000 × (5/100) = 5,000 (for one period; for example, $5,000 per year if the 5% rate is annual).

Frequently Asked Questions

What is Invested Equity?

Invested equity (also called contributed capital) is the amount of equity capital on which the preferred return is calculated. In many private real estate/private equity deals, this is the investor’s contributed equity in the deal; for preferred stock, the analogous base is often the preferred share’s stated value (par or liquidation preference) as described in the offering documents.

Why is the Preferred Rate Important?

The preferred rate is crucial because it sets the return rate investors can expect on the capital base used for the preferred return calculation. This rate often influences investment decisions and the attractiveness of an investment, and it is defined in the relevant offering documents or operating agreement.

How Do Preferred Returns Differ from Common Stock Dividends?

Preferred returns typically offer a stated dividend rate (or contractual return in a private deal) and have priority over common stock dividends, meaning they are paid out first when due. In contrast, common stock dividends are not guaranteed and can fluctuate based on the company’s performance and dividend policy.

Can the Preferred Rate Change Over Time?

It depends on the security/contract. Many preferred shares have a fixed rate, but some are floating-rate or adjustable-rate based on a reference rate. In private deals, the preferred return rate is usually fixed unless the agreement is amended.