How to Determine the Preferred Stock With the Annual Dividend and Rate of Return
Preferred stock is like any other type of stock, where an investor owns a piece of the company. Sometimes dividends --- a portion of the company's profits --- are paid on the stock. The awarding of dividends to preferred stockholders takes priority over holders of other types of stock, like common stock. The drawback, however, is that the value of preferred stock does not grow, and remains static at par value. As a result, preferred stock is generally very easy to price, as its value does not grow but remains fixed. Simple arithmetic is all that's required.
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Instructions
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Gather information regarding the preferred stock. Specifically, you will need the par value of the stock, as well as your own preferred dividend rate of return. The par value of the stock is simply the amount which can be claimed against the value of the firm, and is stipulated on the stock's contract. The rate of return depends on you, the investor. Often, as a rule of thumb, this rate is higher than the yield of government-issued bonds, which are perceived as the safest investment option in the market. Furthermore, this rate must compensate for the risk you are taking in the market. The higher the risk, the higher the required rate of return.
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Acquire information regarding the dividend rate. As a fixed-income security, the stock's dividend rate is also fixed, and is stipulated on the stock's contract.
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Multiply the stock's par value by the annual dividend rate. Divide this result by the required rate of return. This gives you the value of the preferred stock.
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