Price of preferred stock equation

Although preferred stock is an equity instrument Equity Instrument: Ownership interest in the firm. Technically it is a perpetuity.

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As previously explained in time value of money, to value a perpetuity, simply take the annual return in dollars and divide by the appropriate discount rate. The annual return in dollars for a share of preferred stock would be the dividend rate, which is found by taking the dividend rate and multiplying it by the par value for the preferred.

The formula for valuing preferred stock could then be written as follows. Annual Dividend in Dollars Investors' required rate on similar preferred.

An example illustrates the use of the formula. A share of preferred that pays a 5.

The yield on a share of preferred may be calculated by a simple manipulation of the pricing formula. Some features of this site require JavaScript.

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Valuing Preferred Stock Begin Previous Next. This overview was developed by Dr. No adaptation of its content is permitted without permission.