How to Calculate Value of a Share of Preferred Stock

Preferred stock is priced differently than common stock.

Preferred stock is different from common stock in two major ways. The first is that the dividend payments on preferred stock are always payed out before the dividend payments on common stock. The second is that holders of preferred stock have priority over common stock holders if the company assets are ever liquidated. Because of these differences, calculating the value of preferred stock is slightly different than calculating the value of common stock.

Instructions

1. Gather the necessary information. You will need to know the stock's par value, preferred dividend rate and required rate of return. The par value is the amount of money that the investor contributed at the time the shares were issued. The preferred dividend rate is the amount of money payed out to the shareholder at regular intervals and usually represents a fixed percentage of the par value.

2. Multiply the par value by the dividend rate. For example, if you had preferred stock with a $50 par value and a dividend rate of 9 percent, you would multiply 50 by 0.09 to get 4.5.

3. Divide the result by the required rate of return. The resulting quotient is the value of the preferred stock. Continuing with our example from step two and assuming that the required rate of return was 10 percent, we would divide 4.5 by 0.10 to get a final value of $45.

References

• Zen Wealth: Business Finance

Resources

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