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Preferred Stock
Hybrid security.
Similar to bonds in that preferred
stockholders receive a fixed dividend that
must be paid before dividends can be paid on
common stock.
However, unlike interest payments on bonds,
companies can omit dividend payments on
preferred stock without fear of pushing the
firm into bankruptcy.
2
Vp =
D
D
D
D
+
+
+
.
.
.
+
(1+ ks )1 (1+ ks )2 (1+ ks )3
(1+ ks )
13%
3
...
20.00
20.00
20.00
4
3
PV
FV
13
17.70
20.00
13
10.86
20.00
50
13
0.04
20.00
100
13
0.0001
20.00
4
D
Vp =
kp
Vp = value of preferred
D = dividend
kp = discount rate
5
D
20.00
Vp =
=
= 153.85
kp
0.13
6
Preferred Stock
The value of a preferred stock can be
found using the calculator. Treat the stock
as an annuity (end mode) with a large
number of payments (e.g., n=1000).
INPUTS
OUTPUT
1000
N
13
I/YR
PV
-153.85
20
PMT
FV
D1
D2
D3
(1 + k ) (1 + k ) (1 + k )
1
+. . .+
(1 + k )
D1
D0(1 + g)
=
ks g
ks g
11
P0 =
D1
ks g
=
$3.50
0.07
3.50
0.13 0.06
= $50.00
14
P0 =
D0(1+g)
ks g
$2.12
0.07
2(1+0.06)
0.13 0.06
= $30.29
15
P1 =
D2
ks g
= $32.10.
$2.247
0.13 0.06
^
Could also find P
1 as follows:
^
P1 = P0(1.06) = $32.10.
16
P 0 =
D1
D1
+ g.
to k s =
g
ks
P0
Dt
P0 =
t
t =1 (1 + k s )
DN (1 + g)
ks g
+
(1 + k s )N
22
P3 =
25
28
31
P3 =
32
P0 =
D1
.
ki g
1. ki could change:
ki = kRF + (kM kRF )bi.
kRF = k* + IP.
2. g could change due to
economic or firm situation.
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Behavioral Finance
Behavioral finance incorporates
elements of cognitive psychology
to better understand how
individuals and markets respond
to different situations.
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