Article1983

A Theoretical Model for Valuing Preferred Stock

38 citations0/0 files storedThe Journal of Finance

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Stochastic processes and financial applications Financial Markets and Investment Strategies Financial Reporting and Valuation Research

Abstract

ABSTRACT This paper develops a model of preferred stock value which includes the possibility of dividends on the preferred stock being omitted. The analytical framework used is based on the option‐hedging methodology of Black and Scholes. Precise valuation formulae are obtained for cumulative and noncumulative preferred stock in a variety of contexts. The values obtained are quite different from those for either riskless or risky perpetual bonds, which have previously been proposed as being similar to preferred stock.

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References

1973The Pricing of Options and Corporate Liabilities 1958The Cost of Capital, Corporation Finance and the Theory of Investment 1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*2008The cost of capital, corporation finance and the theory of investment 1973Theory of Rational Option Pricing 2005Theory of rational option pricing 1961Dividend Policy, Growth, and the Valuation of Shares 1976The valuation of options for alternative stochastic processes

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2016Diversification Benefits of REIT Preferred and Common Stock: New Evidence from a Utility‐based Framework

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