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:
A retractable preferred share allows an investor to redeem the share whenever the investor wants. As a result, the value of the preferred share is increased.
|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.