Preferred Stock Valuation

According to the general valuation theory, the value of preferred stock is equal to the sum of all

the cash flows generated from the investment, discounted by the investor’s required rate of

Don't use plagiarized sources. Get Your Custom Essay on
Preferred Stock Valuation
Just from $13/Page
Order Essay

return. Because the only cash flow generated from preferred stock is the dividend payment, the

value of a preferred stock equals the present value of all the future preferred stock dividends.

Because a preferred stock is normally nonmaturing, and the dividends are expected to be paid in

equal amounts each year in perpetuity, the value of the preferred stock can be determined simply

by dividing the annual dividend by the required rate of return:

Vps = annual dividend/required rate of return

Vps = D/kps


Vps = value of the preferred stock

D = annual dividend

kps = required rate of return