--- title: Preferred Stock Valuation | Formula, Example, Analysis, Calculator description: Preferred stock is a company’s form of equity that can be used to fund project expansions. Click for more information. --- [![Carbon collective](https://www.carboncollectiveinvesting.com/hubfs/raw_assets/public/CarbonCollective_August2021%20copy/images/carbon-collective-green-investing-logo-white.4f6047d4.svg "Carbon collective")](https://www.carboncollectiveinvesting.com/) - About - Employers - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - [401(k) Comparison Tool](https://www.carboncollectiveinvesting.com/401k/plan-comparison-tool) - Individuals - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [ETF](https://www.carboncollectivefunds.com/) - Learn - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - [Blog](https://blog.carboncollective.co/) - [Tools](https://tools.carboncollective.co/calculator/) - Log in - [Carbon Collective](https://app.carboncollective.co) - [Altruist](https://app.altruist.com) [Talk to a human](https://ask.carboncollective.co/f4o5dylkg) [Sign up](https://app.carboncollective.co/sign-up) [Log In](http://app.carboncollective.co/) [![Carbon collective](https://www.carboncollectiveinvesting.com/hubfs/raw_assets/public/CarbonCollective_August2021%20copy/images/carbon-collective-green-investing-logo.53b28bee.svg "Carbon collective")](https://www.carboncollectiveinvesting.com/) - About - Employers - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - [401(k) Comparison Tool](https://www.carboncollectiveinvesting.com/401k/plan-comparison-tool) - Individuals - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [ETF](https://www.carboncollectivefunds.com/) - Learn - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - [Blog](https://blog.carboncollective.co/) - [Tools](https://tools.carboncollective.co/calculator/) - Log in - [Carbon Collective](https://app.carboncollective.co) - [Altruist](https://app.altruist.com) [Talk to a human](https://ask.carboncollective.co/f4o5dylkg) [Sign up](https://app.carboncollective.co/sign-up) [Log In](http://app.carboncollective.co/) **[Home](https://www.carboncollectiveinvesting.com/) > [Sustainable Investing](https://www.carboncollectiveinvesting.com/sustainable-investing) >** Preferred Stock Valuation # Preferred Stock Valuation ![](https://www.carboncollectiveinvesting.com/hubfs/Brooke%20Tomasetti.png) Written by Brooke Tomasetti | Reviewed by [Subject Matter Experts](https://www.carboncollectiveinvesting.com/subject-matter-experts) Updated on October 1, 2024 Fact Checked Why Trust Carbon Collective? ### Table of Contents Preferred stock is an equity procedure that can be used by any company that wants to fund project expansion. Firms often raise funds through sales of preferred and ordinary stock. Preferred stock is at times referred to as preferred shares. Owners of preferred stock have equal rights to ownership in a company just like counterparts holding shares of common stock shares. Preferred stockholders, however, are not guaranteed a right to voting as is the case with common stock. Nonetheless, they have priority when it comes to receiving dividends and bankruptcy. Since preferred stock bears both the characteristics of equity and debt instruments, it is mostly considered as a hybrid instrument of the two with both equity and fixed income characteristics. [![Learn why investing is the only realistic path to solving climate change.](https://hubspot-no-cache-na2-prod.s3.amazonaws.com/cta/default/20345524/bcc827e7-7a28-46da-a63b-200b2631345a.png)](https://hubspot-cta-redirect-na2-prod.s3.amazonaws.com/cta/redirect/20345524/bcc827e7-7a28-46da-a63b-200b2631345a) Apart from that, the preferred stock also has a par value characteristic that is similar to that of bonds. Their hybrid nature makes them less volatile compared to common stock as it provides a stream of dividends. This means the stock can be considered as an alternative investment by risk-averse investors who want to buy equities. The callable feature of preferred stock is very outstanding as it enables the issuer to be able to redeem them at any time for cash value hence a source of security for investors. Holders of preferred stocks are normally given priority to any common stockholders when dividends are paid. Additionally, dividends tend to be paid at a fixed rate. ## Preferred Stock Valuation Formula The value of the preferred stock can be simply calculated as a fraction of dividends and the discount rate. However, other characteristics, such as being callable, may be taken into account, varying the result. For a simple straight case, preferred stock can be computed as shown below. ![](https://www.carboncollectiveinvesting.com/hubfs/image-png-Apr-22-2022-01-06-24-71-PM.png) As it was initially stated, preferred stocks shareholders normally receive fixed dividends and are always given priority ahead of common stock shareholders when dividends are being paid at the end of the year. The formula for computing the present value of a preferred stock takes into account perpetuity. In determining the value of a share of standard preferred stock, the formula is given as: ![](https://www.carboncollectiveinvesting.com/hubfs/image-png-Apr-22-2022-01-06-58-17-PM.png) To compute the annual dividend per share of preferred stock one needs to multiply the face value of the stock by the stated dividend rate (market assessment of the risk inherent in the preferred stock) hence simplifies the formula above to the one shown below: ![](https://www.carboncollectiveinvesting.com/hubfs/image-png-Apr-22-2022-01-07-25-78-PM.png) Perpetuity is formed by the fixed dividend payments which follow the nature of the preferred stock. In a situation whereby the preferred stock has a constant rate of dividend growth, then we assume that the value is equal to the [present value of a perpetuity](https://www.carboncollectiveinvesting.com/sustainable-investing/present-value-of-growing-perpetuity/). Unlike the formula in a case of simple and straight preferred stock, the other formula elaborates on how to go about a case involving risk inherent in the preferred stock with a stated dividend rate. This formula enables you to arrive at a weighted annual dividend per share of preferred stock by multiplying the face value of the stock and the stated dividend rate hence giving a more realistic picture of the current situation of the stock market. This flexibility in the formula enables one to arrive at the most accurate value of a share of preferred stock in the market. If the dividend has a history of predictable growth, or you know that constant growth will occur, you can use the [Gordon Growth Model](https://www.carboncollectiveinvesting.com/sustainable-investing/gordon-growth-model/) formula: ![](https://www.carboncollectiveinvesting.com/hubfs/image-png-Apr-22-2022-01-08-32-99-PM.png) - P  = Fair Value of the stock - D1 = Expected dividend amount for next year - r   = Cost of Equity or the required rate of return - g   =  Expected growth rate of dividends (assumed to be constant) ## Preferred Stock Valuation Example ### Example 1 For instance, person A is an investor who wants to invest in a straight preferred stock that pays annual dividends of $40. Considering the risk, the market will consider a discount rate of 10%. Compute the preferred stock value of person A. ![](https://www.carboncollectiveinvesting.com/hubfs/image-png-Apr-22-2022-01-09-15-45-PM.png) Person A will pay a price of $400 as the preferred stock value for the security. ### Example 2 Person B, an investor with a share of $5,000 par value preferred stock in a company which pays 12.5% dividends annually. The required rate of return on the preferred stock of 10%. Determine the value of the share. ![](https://www.carboncollectiveinvesting.com/hubfs/image-png-Apr-22-2022-01-09-49-37-PM.png) Person B’s preferred stock at 12.5% required return equals $6250. ## Preferred Stock Valuation Analysis The hybrid nature of preferred stock makes it less volatile than common stock. As a result of this, most investors who are risk-averse normally consider it as an alternative when they want to buy equities. The callable and convertible features of preferred stock have enabled it to be preferred as the name suggests. It’s normally seen as a source of security for investors because when they run out of cash they can redeem the shares for cash value. Similarly, the holders of preferred shares are normally given priority ahead of their common stockholders’ counterparts. An investor should use preferred stock value to ensure that he/she is investing in a company with positive returns. For instance, an investor should consider investing in a preferred stock shares business with a company that pays a higher preferred dividend rate than the required rate of return. In Example 2 above, the preferred dividend rate is 12.5% while the required rate of returns is 10% leading to a $6250 for a $5000 par value share. ## Preferred Stock Valuation Conclusion - Preferred stock is a company’s form of equity that can be used to fund project expansions. - This formula requires two variables: annual dividend per share of preferred stock and the rate of return required - Annual dividend per share of preferred stock is computed by multiplying the face value of the stock and the stated dividend rate - There is an inverse relationship between the stated preferred dividend rate and the required rate of return - If the required rate of return is lower than the preferred dividend rate then the preferred stock will have a value above its par and vice versa. - When the required rate of return is equal to the preferred dividend rate, then the value of the preferred stock will match its par value. ## Preferred Stock Valuation Calculator You can use the preferred stock calculator below to quickly calculate a company’s price or value of preferred stock in relation to its annual dividend per share of preferred stock and the rate of return required by entering the required numbers. Annual Dividend Rate Rate of Return Par Value of Share Preferred Stock Value per Share ## FAQs ### 1. What does preferred stock mean? Preferred stock is a type of security that a corporation issues to raise capital. When a company has profits, it can either pay dividends or invest them back into the business. If the company pays dividends on common stocks, then the shareholders earn money periodically. ### 2. What is the difference between preferred stock and common stock? The primary difference between preferred stock and common stock is the dividend pattern. Shareholders with a stake in preferred stocks usually have priority in receiving dividends when there are not enough funds to pay all shareholders. In contrast, holders of common stocks have no preference for when they will receive their dividends. ### 3. What are the benefits of preferred stock? Preferred stock is a type of security that can be used to fund expansion or dividend payments. It also benefits investors since the dividends usually yield higher returns than common stocks, which makes them more appealing. ### 4. Is the preferred stock a good investment? Many preferred stocks offer a higher return than other types of stocks. Some companies prefer to use dividends instead of reinvesting them into their business, which is why investors may benefit from buying preferred shares. ### 5. Is preferred stock debt or equity? Preferred shares are equity. ### Related Topics - [Sustainable 401(k) Plan](https://www.carboncollective.co/401k) - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing/) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - [Retirement Glossary](https://www.carboncollective.co/sustainable-investing/retirement-planning-glossary) - [Best Retirement Plans](https://www.carboncollective.co/sustainable-investing/the-10-best-retirement-plans) - [Wealth Manager Vs Financial Advisor](https://www.carboncollective.co/sustainable-investing/wealth-manager-vs.-financial-advisor) ![Attend Our Next Webinar](https://www.carboncollectiveinvesting.com/hubfs/carbon-collective-green-investing-icon-webinar.12af7b6e.svg) ### Attend Our Next Webinar Join our next Sustainable Investing 101 webinar, get our favorite DIY options, and walk through how we build our portfolios. [Watch Now](https://www.carboncollective.co/sustainable-investing-webinar-green-retirement-month) ![Get Our Newsletter](https://www.carboncollectiveinvesting.com/hubfs/carbon-collective-green-investing-icon-demo.6ed28722.svg) ### Get Our Newsletter Go a level deeper with us and investigate the potential impacts of climate change on investments like your retirement account. Join Newsletter ![close-typeform](data:image/gif;base64,R0lGODlhEQARAIAAAODn7P///yH5BAEHAAEALAAAAAARABEAAAIqBIKpab3v3EMyVHWtWZluf0za0XFNKDJfCq5i5JpomdUxqKLQVmInqyoAADs=) ![Talk To A Human](https://www.carboncollectiveinvesting.com/hubfs/carbon-collective-green-investing-icon-chat.49d48c5b.svg) ### Talk To A Human Joining a new investment service can be intimidating. We’re here for you. Click below to email us a question or book a quick call. [Ask a Question](https://ask.carboncollective.co/f70pooobq) Topics ## Sustainable Investing Topics View our list of some topics below. See More - Portfolios - [Performance](https://www.carboncollectiveinvesting.com/returns) - About - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - Learn - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - Contact - [Contact us](mailto:hello@carboncollective.co) - [Legal](https://www.carboncollective.co/legal) - [Privacy Policy](https://www.carboncollectiveinvesting.com/hubfs/2022-11%20Carbon%20Collective%20Privacy%20Policy.pdf) - [Back to top](https://www.carboncollectiveinvesting.com/sustainable-investing/preferred-stock-valuation#top-of-page) DISCLAIMERS: Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective"), an SEC-registered investment adviser. A copy of Carbon Collective's current written disclosure statement discussing Carbon Collective’s business operations, services, and fees is available at the SEC’s investment adviser public information website – [www.adviserinfo.sec.gov](https://adviserinfo.sec.gov/firm/summary/310129) or [our legal documents here](https://blog.carboncollective.co/legal-documents/). The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. Carbon Collective does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Carbon Collective’s web site or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Investments in securities: Not FDIC Insured • No Bank Guarantee • May Lose Value. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Carbon Collective's charges and expenses. Carbon Collective's internet-based advisory services are designed to assist clients in achieving discrete financial goals. They are not intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation and do not incorporate specific investments that clients hold elsewhere. For more details, see our Form CRS, Form ADV Part 2 and other disclosures. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature. Not an offer, solicitation of an offer, or advice to buy or sell securities in jurisdictions where Carbon Collective is not registered. © 2026 Carbon Collective Corporation. All rights reserved. × #### Fact Checked Carbon Collective partners with financial and climate experts to ensure the accuracy of our content. Our team of reviewers are established professionals with years of experience in areas of personal finance and climate. They have contributed to top tier financial publications, such as Reuters, Axios, Ag Funder News, Bloomberg, Marketwatch, Yahoo! Finance, and many others. This team of experts helps Carbon Collective maintain the highest level of accuracy and professionalism possible. × #### Why Trust Carbon Collective Carbon Collective is the first online investment advisor 100% focused on solving climate change. We believe that sustainable investing is not just an important climate solution, but a smart way to invest. We follow ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. Much of our research comes from leading organizations in the climate space, such as Project Drawdown and the International Energy Agency (IEA). Our goal is to deliver the most understandable and comprehensive explanations of climate and finance topics. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including MarketWatch, Bloomberg, Axios, TechCrunch, Forbes, NerdWallet, GreenBiz, Reuters, and many others. We strive to empower readers with the most factual and reliable climate finance information possible to help them make informed decisions. } ```json { "@context" : "https://schema.org", "@type" : "Organization", "alternateName" : "Carbon Collective", "contactPoint" : { "@type" : "ContactPoint", "areaServed" : "US", "availableLanguage" : "en", "contactType" : "customer service", "telephone" : "(650) 868-2697" }, "logo" : "https://www.carboncollective.co/hubfs/CarbonCollectiveLogo.png", "name" : "Carbon Collective Investing LLC", "sameAs" : [ "https://www.facebook.com/carboncollectiveinvesting/", "https://twitter.com/carbncollective", "https://www.instagram.com/carbon.collective/", "https://www.youtube.com/channel/UC769Y-F-L_B37kyQfdpvyXA", "https://www.linkedin.com/company/carbon-collective/", "https://www.crunchbase.com/organization/carbon-collective", "https://adviserinfo.sec.gov/firm/summary/310129", "https://www.wikidata.org/wiki/Q110243690" ], "url" : "https://www.carboncollective.co/" } ``` ```json { "@context" : "https://schema.org", "@type" : "FAQPage", "mainEntity" : [ { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "Preferred stock is a type of security that a corporation issues to raise capital. When a company has profits, it can either pay dividends or invest them back into the business. If the company pays dividends on common stocks, then the shareholders earn money periodically." }, "name" : "What does preferred stock mean?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "The primary difference between preferred stock and common stock is the dividend pattern. Shareholders with a stake in preferred stocks usually have priority in receiving dividends when there are not enough funds to pay all shareholders. In contrast, holders of common stocks have no preference for when they will receive their dividends." }, "name" : "What is the difference between preferred stock and common stock?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "Preferred stock is a type of security that can be used to fund expansion or dividend payments. It also benefits investors since the dividends usually yield higher returns than common stocks, which make them more appealing." }, "name" : "What are the benefits of preferred stock?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "Many preferred stocks offer a higher return than other types of stocks. Some companies prefer to use dividends instead of reinvesting them into their business, which is why investors may benefit from buying preferred shares." }, "name" : "Is the preferred stock a good investment?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "Preferred shares are equity." }, "name" : "Is preferred stock debt or equity?" } ] } ``` ```json { "@context" : "https://schema.org", "@type" : "BlogPosting", "author" : { "@type" : "Person", "name" : "https://20345524.fs1.hubspotusercontent-na1.net/hubfs/20345524/Brooke%20Tomasetti.png", "url" : "https://www.carboncollectiveinvesting.com/sustainable-investing/author/brooke-tomasetti" }, "dateModified" : "2024-10-01", "datePublished" : "2021-03-24", "description" : "Preferred stock is a company’s form of equity that can be used to fund project expansions. Click for more information.", "headline" : "Preferred Stock Valuation | Formula, Example, Analysis, Calculator", "image" : "", "mainEntityOfPage" : { "@id" : "https://www.carboncollectiveinvesting.com/sustainable-investing/preferred-stock-valuation", "@type" : "WebPage" }, "publisher" : { "@type" : "Organization", "logo" : { "@type" : "ImageObject", "url" : "https://www.carboncollective.co/hubfs/CarbonCollectiveLogo.png" }, "name" : "Carbon Collective" } } ```