chapter 7: equity valuation part 2 formulas for preferred shares

Question 1

determine the required return on equity for preferred shares

Answer 1

K= RF + risk premium

K = require return on equity 
RF = risk free rate of return (real rate + expected inflation) 

• like a perpetual annuity

Question 2

Estimate the value of the preferred share

Answer 2

Pps = Dp / Kp

Pps = PV or market price (selling price)

Dp = dividend amount

(face value x stated dividend rate)

Kp = required rate of return or discount rate

Question 3

Determine the required rate of return on preferred shares

Answer 3

Kp = Dp / Pps

Kp = required rate of return

Dp = dividend amount

Pps = PV or market price (selling price)

Question 4

determine the preferred share price

Answer 4

dividends paid per share / required return

Question 5

determine dividends paid paid per share

Answer 5

price x required rate of return

Question 6

determine dividend rate

Answer 6

dividend paid per share / par value

Question 7

determine required return

Answer 7

dividend paid per share / price

Question 8

determine par value

Answer 8

dividend paid per share / dividend rate

Question 9

determine risk premium

Answer 9

1. calculate required return

price / (dividend rate x par) x 100

2. required return - risk free rate = risk premium