{"id":17778,"date":"2021-07-15T10:47:27","date_gmt":"2021-07-15T10:47:27","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=17778"},"modified":"2024-04-05T05:36:14","modified_gmt":"2024-04-05T05:36:14","slug":"value-of-a-noncallable-perpetual-preferred-stock","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/value-of-a-noncallable-perpetual-preferred-stock\/","title":{"rendered":"Value of a Noncallable Perpetual Preferred Stock"},"content":{"rendered":"<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/fiJA5WhgigU\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p>Firms with no additional opportunities to generate returns above the required rate of return should distribute all of their earnings in dividends. Their securities have a specified fixed dividend rate and have no maturity date. As dividends on these securities are fixed, and \\(g\\) equals 0, their value can be computed as:<\/p>\r\n<p>$$\\text{V}_{0}=\\frac{\\text{D}_{\\text{p}}}{\\text{r}_{\\text{p}}}$$<\/p>\r\n<p>Where:\u00a0<\/p>\r\n<p>\\(\\text{D}_{\\text{p}}=\\) Perpetual dividend.<\/p>\r\n<p>\\(\\text{r}_{\\text{p}}=\\) Cost of preferred equity.<\/p>\r\n<h4>Example: Calculating the Value of a Noncallable Perpetual Preferred Stock<\/h4>\r\n<p>ABC Ltd. has a noncallable perpetual preferred stock outstanding with a dividend of 10% (based on an issue at par of $100). Given that the investors\u2019 required rate of return for holding these shares is 12%, the current value of the shares is <em>closest<\/em> to:<\/p>\r\n<h4>Solution<\/h4>\r\n<p>$$\\begin{align*}\\text{Value of perpetual preferred shares}&amp;=\\frac{\\text{D}_{\\text{p}}}{\\text{r}_{\\text{p}}}\\\\ \\\\ \\text{Where } \\text{D}_{\\text{p}}&amp;=10\\% \\times100=\\$10 \\\\ \\\\ \\text{Value of perpetual preferred shares}&amp;=\\frac{\\$10}{0.12}=$83.33 \\end{align*}$$<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>A company has a $100 par 6% fixed-rate perpetual preferred stock. Given a required rate of return of 8%, the current value of the security is <em>closest<\/em> to:<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>$55.<\/li>\r\n\t<li>$70.<\/li>\r\n\t<li>$75.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is C.<\/strong><\/p>\r\n<p>$$\\begin{align*}\\text{V}_{0}&amp;=\\frac{\\text{D}_{\\text{p}}}{\\text{r}_{\\text{p}}}\\\\ \\\\&amp;=\\frac{6.00}{0.08}=75\\end{align*}$$<\/p>\r\n<\/blockquote>\r\n<p>Reading 23: Discounted Dividend Valuation<\/p>\r\n<p><em>LOS 23 (d) C<\/em><em>alculate the value of noncallable fixed-rate perpetual preferred stock.<\/em><\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>Firms with no additional opportunities to generate returns above the required rate of return should distribute all of their earnings in dividends. Their securities have a specified fixed dividend rate and have no maturity date. As dividends on these securities&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,401],"tags":[216,402,447],"class_list":["post-17778","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-equity-valuation","tag-cfa-level-2","tag-equity-valuation","tag-value-of-a-noncallable-perpetual-preferred-stock","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>Value of a Noncallable Perpetual Preferred Stock - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"Understand how to calculate the value of noncallable fixed-rate perpetual preferred stock using the dividend discount model.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/value-of-a-noncallable-perpetual-preferred-stock\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Value of a Noncallable Perpetual Preferred Stock - 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