- CFA Exams
- 2024 Level I
- Topic 6. Equity Investments
- Learning Module 8. Equity Valuation: Concepts and Basic Tools
- Subject 4. Preferred Stock Valuation
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Subject 4. Preferred Stock Valuation PDF Download
A preferred stock pays a fixed dividend for an infinite period. Thus, a preferred stock is a perpetuity since it has no maturity. Payments of preferred dividends are made only after the firm pays its bond interest. Thus,
where r is the required rate of return on preferred stock, and the dividend is assumed to be perpetual.
The basic types of preferred stock include:
User Contributed Comments 4
|ratoncillo||Where is the formula?|
|GinnyB||ratoncillo: V = D/r|
|jonan203||FYI, preferreds typically have a $25 par value that is used to calculate the implied "coupon" rate.
$25 x .05 = $1.25 dividend
|bravoshieh||With redeemable preferred shares, the issuer has the right to redeem the outstanding stock from the buyers at a specific price. Redeemable preferred shares are also referred to as callable preferred shares.
Retractable preferred shares give the buyer the right to sell the stock back to the issuer at a specific fixed price.