CFA CFA Level 1 Valuing a preferred stock

Valuing a preferred stock

  • This topic has 2 replies, 3 voices, and was last updated Apr-17 by Snippy.
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    • lulu123
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      Preferred stock of 6$ dividend
      sustainable growth rate of company is 5%
      yield on comparable stocks is 11.5%
      marginal tax rate is 30%

      value the stock of the company
      the answer is 6/0.115 = 52$

      why did we not use the growth rate in the denominator? I would have gotten ninety something dollars if : 6/ (0.115-0.05)
      is it a rule for preferred stocks to not use growth rate??

    • GraemeA
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      Yes….. They are treated like a perpetuity since they have no maturity… Also, unlike common shareholders, preferred shareholders receive fixed payments that do not generally grow.

    • Snippy
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      Yep. What @GraemeA said.

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