Valuation of Preferred Stocks

Preferred stocks can be valued using the dividend discount model, as they usually pay a fixed dividend. Since preferred stocks have indefinite maturity, the DDM can be represented as:

$V_{P}=\frac{D}{k_{p}}$

Let’s say that a company has issued $100 par preferred stock, and pays an annual dividend of$6. The required return is 9%. The value of the preferred stock will be:

V = $6/0.09 =$66.67

The above calculation assumes that the preferred stock has indefinite maturity.

Let’s say that stock has a maturity of 2 years. The value will now be calculated as follows:

V = $6/(1.09) +$6/(1.09)^2 + $100/(1.09)^2 =$94.72