Preferred Stock Valuation Examples, Illustrations, Concepts, Sample Help Online

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Preferred stock Valuation Examples Concept

Preferred stock are those stocks that are preferred over equity stockholders while payment of dividends and distribution of assets at the time of liquidation.The dividends on preferred stocks are generally fixed that is whether the company is unable to pay dividends claimed by other shareholders it has to pay to its preferred stockholders. The companies therefore usually do not want to issue preferred stocks as most of the shareholders are interested in preferred stocks due to its fixed dividend payments feature. Preferred stocks are valued at par. It means they can claim against the value of the firm. It is calculated using the following formula

Preferred stock Valuation formula
Preferred stock price = Preferred stock Dividend/ Required Return on the stock

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Preferred stock Valuation Examples Explanation

Let’s understand the concept of Preferred Stock Valuation with help of an example.

Example 1: The preferred stock at par value is $500 per share. Dividend rate is 6% and required rate of return is 10%.
Preferred stock Valuation = ($500 x .06)/ .10 = $300
By using this formula, we can thus find the price of preferred stock.

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