Preferred Shares

A Hybrid Security that has features of common stock and bonds.

• Stock-like features: No maturity date, pays a dividend
• Bond-like features: fixed dividend, essentially a perpetual bond

No finite term No voting rights In bankruptcy, claims on debt are paid first, then preferred stock, and finally common stock.

Valuation

• A perpetuity is an annuity that never ends.

$$\text{Price}=\frac{Div}{(1+r_{ps}{)}^1}+\frac{Div}{(1+r_{ps}{)}^2}+\frac{Div}{(1+r_{ps}{)}^3}+...=\frac{Div}{r_{ps}}$$

Where:

• $r_{ps}$ = Required rate of return for preferred shares
• $Div$ = Dividend paid by preferred shares

Example

What is the price of a preferred share if the annual dividend if $1,andtherequiredreturn,$r_{ps}$, is 10%?

$$\text{Price}=\frac{1}{0.10}=10$$