{"id":1971,"date":"2019-09-27T13:33:00","date_gmt":"2019-09-27T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1971"},"modified":"2026-03-25T11:00:59","modified_gmt":"2026-03-25T11:00:59","slug":"intrinsic-value-preferred-stock","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/equity\/intrinsic-value-preferred-stock\/","title":{"rendered":"Intrinsic Value of a Preferred Stock"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Effect of longer maturity on the intrinsic value of preferred shares\",\n    \"text\": \"ABC\u2019s 5% dividend-paying preferred shares have a par value of $100. The required rate of return on preferred shares with the same rating is 7% as of the valuation date. The preferred shares will mature in ten years.\\n\\nAll else being equal, if the preferred shares instead matured in 15 years, how would the intrinsic value of ABC\u2019s preferred shares change?\\n\\nA. The longer maturity would increase current valuation.\\n\\nB. The longer maturity would decrease current valuation.\\n\\nC. The longer maturity would not change current valuation.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"B. The longer maturity would decrease current valuation.\\n\\nWhen the dividend rate on preferred shares is below the required rate of return, the shares trade below par value. Extending the maturity from 10 years to 15 years increases the length of time investors receive dividends that are lower than the required return. This reduces the present value of the cash flows, leading to a lower intrinsic value of the preferred shares.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/GWw4je023oo?si=GcNA-hL3P26cUpfy\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n\n<p>The intrinsic value of a non-callable, non-convertible preferred stock can be calculated in much the same way as a share of common stock, except the expected sales price is replaced by the par value of the preferred shares.<\/p>\n\n\n<p>$$ V_0=\\sum_{t=1}^n\\frac{D_t}{(1+r)^t}+\\frac{F}{(1+r)^n}$$<\/p>\n<p>Where:<\/p>\n<p><em>V<sub>0<\/sub><\/em> = present value of a share of stock today<\/p>\n<p><em>D<sub>t<\/sub><\/em> = expected dividend in year <em>t<\/em><\/p>\n<p><em>r<\/em> = required return on the stock<\/p>\n<p><em>F<\/em> = par value of the preferred stock<\/p>\n<p><em>n<\/em> = years to maturity<\/p>\n<blockquote>\n<h3><strong>Question<\/strong><\/h3>\n<p>ABC\u2019s 5% dividend-paying preferred shares have a par value of $100. The required rate of return on preferred shares with the same rating is 7% as of the valuation date. The preferred shares will mature in ten years.<\/p>\n<p>All else being equal, if the preferred shares instead matured in 15 years, how would the intrinsic value of ABC\u2019s preferred shares change?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">The longer maturity would increase current valuation.<\/li>\n<li data-tadv-p=\"keep\">The longer maturity would decrease current valuation.<\/li>\n<li data-tadv-p=\"keep\">The longer maturity would not change current valuation.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>B.<\/strong><\/p>\n<p>The intrinsic value of preferred shares is influenced by the time to maturity and the required rate of return. When the dividend rate of preferred shares is lower than the required rate of return, the value of the shares will be below par value.<\/p>\n<p>In this case, as the maturity of the preferred shares increases from 10 years to 15 years, it extends the period over which investors will receive dividends at a rate lower than the required return. This longer period of receiving lower-than-required returns decreases the present value of future cash flows associated with the preferred shares.<\/p>\n<\/p>\n<\/blockquote>\n\n\n<div style=\"text-align:center; margin: 40px 0;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" style=\"display:inline-flex; align-items:center; justify-content:center; padding:12px 20px; border-radius:999px; background-color:#1a73e8; color:#ffffff; text-decoration:none; font-weight:600;\">\n    Start Free Trial \u2192\n  <\/a>\n  <p style=\"font-size:15px; margin-top:12px; color:#555;\">\n    Learn how to calculate the intrinsic value of preferred stock as the present value of expected dividends and par value, how required return affects valuation, and how these concepts are tested in CFA Level I equity investments.\n  <\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>The intrinsic value of a non-callable, non-convertible preferred stock can be calculated in much the same way as a share of common stock, except the expected sales price is replaced by the par value of the preferred shares. $$ V_0=\\sum_{t=1}^n\\frac{D_t}{(1+r)^t}+\\frac{F}{(1+r)^n}$$&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[8],"tags":[],"class_list":["post-1971","post","type-post","status-publish","format-standard","hentry","category-equity","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Intrinsic Value of Preferred Stock | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Learn to value preferred stock using a fixed dividend, par value, and required rate of return. 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