Value of Preferred Stock

M

mrabiner

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
This question showed up in the PM section about the value of 100 Par preferred stock with a 9% dividend, and a current price of $90... dont remember much else, but the answers were under or overvalued by 9.09 percent, or fairly valued, or something else. Anyone remember this one?
 
The value of preferred stock depends on the dividend and the credit-worthiness of the company (as well as characteristics of the preferred about cumulative vs non-cumulative, voting rights, conversion, etc.).
 
preferred stock valuation is similar to an annuity... dividend/required rate of return

i dont remember the exact answer or the numbers in the question though.
 
what was the req rate of return in the q? i vaguely remember it being 10%, so 9/.1 = 90 and i want to say i put fairly valued, but it's getting fuzzier by the day.
 
i think you are right bannisja, I had it as fairly valued
 
I think this might be the way to break it down.

To evaluate whether it is fairly valued, we must set up the perpetual annuity formula below:

Par value = perpetuity of preferred stock

PV = A/r

A = annuity payment = $100 (par value) * 0.09 = $9
r = yield = $9/$90 = 10%
PV = value now (market price) = $90

$90 = $9 / 0.10 = $90

The value of the preferred stock is supposed to be at $90, which it is. Thus, it is fairly valued.
 
fairly valued:)
they try to give extra data to divert attention
 
nolabird032 Wrote:
-------------------------------------------------------
> preferred stock valuation is similar to an
> annuity... dividend/required rate of return
>
> i dont remember the exact answer or the numbers in
> the question though.


Except an annuity is about 16 steps up the capital food chain.
 
yeah that's correct, there was a required rate of return of 10% so it was fairly valued... woo hoo.
 
is that the question that had options like overvalued because the value was overpriced because the stock value was $81 something and another option was it was underpriced at 81?
 
nitya36 Wrote:
-------------------------------------------------------
> fairly valued:)
> they try to give extra data to divert attention


and were successful in confusing people . -1 there.
 
This thread seems a little weird to me. Was the question value some "risk-free preferred stock"? Preferred stocks are worth lots of money if you believe that they will never stop paying dividends. You could make a lot of money buying preferred stock and shorting the most senior debt you can find if you could value preferred stock like a risk-free perpetuity. On the other hand, you can probably just call it capital structure arbitrage, put on the fancy suit, and collect your 2/20 anyway...
 
You must log in or register to reply here.
Back
Top