Lesson 11 of 11 · All lessons in this module
- Present value models: DDM and FCFEVideo lesson
- Choosing the cash flow: dividends or FCFE
- FCFF, EBITDA and residual income
- Preferred stock and the Gordon growth modelVideo lesson
- Multistage dividend discount modelsVideo lesson
- Growth assumptions for any cash flow: constant, implied and two-stage
- The DCF process: discount rates, terminal values and ranges
- Integrated cases: negative growth and reconciling FCFE with FCFF
- Integrated cases: two-stage FCFF with debt, and the effect of the debt ratio
- Shortcomings of constant and multistage growth models
- Preferred shares: required return and contingency features
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 11 of 11 · 9 min
Preferred shares: required return and contingency features
A plain preferred share is valued like a bond at a required return below the common equity rate, its market price reveals that return, and call, put and conversion features shift its value and the dividend it must offer.
In short
- Preferred valuation is a DDM with three changes: a fixed dividend D, par value instead of a terminal value, and a lower rate .
- is lower because preferred holders have priority over common holders for dividends and in liquidation.
- Implied required return of a perpetual preferred: .
- Features that help the issuer (call) lower value, so they need a higher dividend; features that help the investor (put, conversion) raise value and come with a lower dividend.
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