This module 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 9 of 9 · 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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