Preferred Stock Valuation

Preferred Stock Valuation

Preferred stock valuation: Preferred stocks promise a fixed dividend, sometimes forever but usually for a finite term. Perpetual preferred are those preferred that are expected to provide an indefinitely long. To determine the worth of preferred stock, the present value of future cash flows must be calculated using discounted cash flow analysis.

  • Effective personal taxes
  • Corporate ownership of preferred stock
  • Others point about preferred stock.

The value of a preferred stock equals the present value of its future dividend payments discounted at the required rate of return of the stock. If preferred stocks have a fixed dividend, then we can calculate the value by discounting each of these payments to the present day. This fixed dividend is not certain in common shares. If you take these payments and compute the sum of the present values into infinity, you will find the value of the stock. In most cases the preferred stock is perpetual in nature; hence the price of a share of preferred stock equals the periodic dividend divided by the required rate of return. Preferred stockholders are paid after the bondholders but before the holders of common stock.

Share This Post