Free Online Stock Valuation Calculator | Common Stock : constant growth model | Preferred Stock Calculator
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Preferred Stock provides stockholders with prior claim to a corporation's profits and assets over holders of common stock. Corporations watch current market conditions and try to offer preferred stock that will be attractive to investors. Holders of preferred stock often give up some of the rights that go with common stock - such as voting rights, preemptive rights, or even some earning potential - in return for their more stable earnings that come from preferred stock. It is less risky and it pays a fix dividend at regular periods and it has no stated maturity date and given the fixed nature of its payments, this is similar to a perpetual bond. Recently U.S. government bought preferred stocks of major US financial institutions to avert a major global economic turmoil which was triggered by crisis in US mortgage industry that led to bankruptcies and mergers of some of the major US and European banking corporations. The valuation of perpetual stock is computed as
valuation preferred no call
where Dp is the given annual dividend per share of preferred stock, kp is the appropriate discount rate.
If Caterpillar Co. had a 8% , $100 par value preferred stock issue outstanding and your required rate of return was 13% on this investment, its value per share to you would be

valuation preferred no call example

Preferred Stock with call price are valued as sum of present value of discounted cash flows of dividends and present value of call price, we may use the the following equation for valuation of such stock
valuation preferred call

Common Stock is the most prevalent of capital stocks. When a corporation has only one kind of capital stock, it will be common stock. When the stock is issued, the owners receive certain rights from the corporation. These rights include

  1. The right to vote at stockholders' meetings
  2. The right to share in profits by receiving dividends
  3. The right to dispose of or sell their stock
  4. The right to maintain their proportionate ownership interest in the company. This is called preemptive right
  5. The right, when a company is liquidated to share in assets after creditors and others with prior claims are paid off

Dividend Discount Models are designed to compute the intrinsic value of a share of common stock under specific assumptions as to the expected growth trends of future dividends and the appropriate discount rate to employ. Morgan Stanley, Merrill Lynch  and a number of other investment banks make such calculations based on their own models and estimates. One such model is constant growth rate when dividends are expected to grow at a constant rate. The following equation and its variation is used to value such stocks

valuation common stock constant growth
where D0 is the present dividend per share. Thus the dividend expected at the end of period n is equal to the most recent dividend times the compound growth factor (1+g)n. We must assume that ke is greater than g because a dividend growth rate that is always greater than the capitalization rate would imply an infinite stock value, we could rewrite the above equation as

valuation common stock constant growth 2