High School
SAT
ACT
University
MCAT
LSAT
DAT
Wize University Introduction to Finance Textbook > Equity Valuation

Preferred Shares

Equity BasicsPrevious Section
Common Shares (No Growth)Next Section
Popular Courses
Find My Course
0:00 / 0:00

Preferred Share Valuation

Price of a preferred share is based on dividend and required rate of return. Treat preferred shares as ordinary perpetuities.

Preferred Share Pricing

  • If dividend rate > required rate of return: Preferred shares are priced at a premium (Price > Book Value)
  • If dividend rate < required rate of return: Preferred shares are priced at a discount (Price < Book Value)
  • If dividend rate = required rate of return: Preferred shares are priced at par (Price = Book Value)

Computing the Dividend Payment

Based on the book value of the preferred shares and the dividend rate.


PAGE BREAK

Computing the Price of a Preferred Share

  • The present value of future dividends
  • The required rate of return is used as the discount rate


Where:
P = Price of the preferred share
D = Dividend
r = Required rate of return

0:00 / 0:00

Example: Preferred Shares

Wize Corporation has preferred shares outstanding with a book value of $80. The company pays a 5% dividend on these shares each year and investors require a return of 10%. What it the price of these shares?

Practice: Preferred Shares

ABC Inc. wishes to issue new preferred shares at par. It currently has existing preferred shares outstanding that are trading at $157.60 and pay an 8% annual dividend. If both the old and new preferred shares have a book value of $100, what should the dividend rate be on the new shares?

%

Round your final answer to 2 decimal places.
Extra Practice
XYZ Corp would like to issue preferred shares to raise capital for expanding into Europe. The company currently has 6%-preferred shares outstanding that are trading at $145.50 per share. The new shares to be issued are of equal risk to the existing ones and the company would like for them to be issued at par. What dividend rate should the new preferred shares offer assuming a book value of $100 per share for both the new shares and the existing ones?
What is the dividend rate on preferred shares if they are trading at $88.90, have a required rate of return 12.5% and a book value of $100 per share.
A company's preferred shares are currently valued at $125 per share. If the dividend on these shares is $4 per year, what is the required rate of return?
ABC Inc just issued 3% preferred shares with a par value of $90. If the required rate of return on these shares is 8%, what is the value of the shares?