How to Calculate the Price of Preferred Stock

Preferred stock is a form of stock that is a bit different from common stock. Preferred stock is viewed as a hybrid as it features debt and common stock. Preferred stock owners do get dividends like owners of common stock, but the dividends are typically fixed for preferred stock. Since that is the case, you can easily calculate the price of preferred stock using the par value, the preferred dividend and the required rate of return.

Difficulty: Moderately Challenging

Instructions

1. Get the par value. Preferred stock has par value, which is used to calculate the dividend payments for preferred stock. You can find this when researching the stock using a brokerage account, such as with Fidelity.

2. Find the preferred dividend rate. The preferred dividend rate is something that you will also find when looking at preferred stock at a brokerage. It is a percent of the par value of the preferred stock.

3. Calculate the preferred dividend. To get the preferred dividend you will multiply the preferred dividend rate by the par value. To do this calculation be sure to convert the preferred dividend rate from a percentage to a number by moving the decimal point two places to the left. For example, if the preferred dividend rate is 7 percent then you would convert that to 0.07.

4. Get the yield. If you do not know the cost of the preferred stock then you will typically have the required rate of return, which is also known as they yield. If you are looking at some preferred stock this will be listed on the research materials a brokerage has on the preferred stock. This will be listed as a percentage.

5. Use a simple equation to calculate the price of the preferred stock. If you know the preferred dividend and the yield you can solve for the price of preferred stock. The equation is preferred dividend/ yield = price. For example, if the preferred dividend is 7 and the yield is 9 percent, or 0.09, then the price of the preferred stock is $77.78.

Resources

• Preferred Stock Valuation
• Constant Growth Stock Valuation
• Fidelity Stock Research