How to Calculate the Price of Preferred Stock

Calculate the price of preferred stock using the par value, the preferred dividend and the required rate of return.

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

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.

2. Find the preferred dividend rate. You also can find the preferred dividend rate at a brokerage site. It is a percent of the par value of the preferred stock.

3. Calculate the preferred dividend by multiplying the preferred dividend rate by the par value. 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, convert that to 0.07.

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

5. Use the following equation to calculate the price of the preferred stock: preferred dividend / yield = price. For example, if the preferred dividend is 7 and the yield is 9 percent, or 0.09, the price of the preferred stock is $77.78.

References

• Fidelity: Stock Research Center

Resources

• ZenWealth.com: Preferred Stock Valuation