On this web page we look at the definition of Preferred Stocks and formula for valuation of such stock along with an example illustrating such valuation.
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How you define Preferred stocks
Preferred stock provides stockholders with prior claim to a corporation's profits and assets over holders of common stock. Corporations watch current market conditions and try to offer preferred stock that will be attractive to investors. Holders of preferred stock often give up some of the rights that go with common stock - such as voting rights, preemptive rights, or even some earning potential - in return for their more stable earnings that come from preferred stock. It is less risky and it pays a fix dividend at regular periods and it has no stated maturity date and given the fixed nature of its payments, this is similar to a perpetual bond. Recently U.S. government bought preferred stocks of major US financial institutions to avert a major global economic turmoil which was triggered by crisis in US mortgage industry that led to bankruptcies and mergers of some of the major US and European banking corporations.
What is the formula for Preferred stocks Valuation
The valuation of perpetual stock is computed as
where Dp is the given annual dividend per share of preferred stock, kp is the appropriate discount rate.
How you do calculation for Preferred stocks Valuation
If Caterpillar Co. had a 8% , $100 par value preferred stock issue outstanding and your required rate of return was 13% on this investment, its value per share to you would be
Preferred Stock with call price
Preferred stocks with call price are valued as sum of present value of discounted cash flows of dividends and present value of call price, we may use the the following equation for valuation of such stock
