the value of preferred stock is the
present value of all future dividends in
order to calculate the value of
preferred stock there are three values
we need to consider often you will be
given two of these values and solve for
the third I'll show you how to do that
in a moment to start with the three
values are the amount of annual dividend
the required or expected rate of return
and the preferred stock value or market
price so if we know the amount of annual
dividend and the required rate of return
we can solve for the preferred stock
value by dividing the dividend by the
rate of return that's one way to use the
formula we can also do it this way if we
know the amount of annual dividend and
the preferred stock market value or
market price we can solve for the
expected rate of return by dividing the
dividend by the stock price so we can
solve for price by dividing dividend by
return or solve for return by dividing
dividend by price let's look at an
example Howard Jones is considering a
purchase of five dollar preferred stock
for $45 per share similar preferred
stock offer a rate of return of 10% what
is the most Jones is willing to pay for
the stock we will use the formula annual
dividend divided by required rate of
return to determine the preferred stock
value the annual dividend is five
dollars per share we divide that by the
rate of return of similar securities to
get $50 per share since Jones can buy
the stock for $45 per share per share he
should since he values it at $50 per
share let's look at another example
Howard Jones is considering the purchase
of $5 preferred style
for $45 per share Jones only purchases
securities that return 10% or greater
what is the expected rate of return for
the stock we will use the formula annual
dividend divided by preferred stock
market price to determine the expected
rate of return the annual dividend is
five dollars per share we divide that by
the market price of $45 per share to get
eleven point 11 percent expected rate of
return since Jones is looking for
investments that return 10 percent a
greater he should purchase the preferred
stock