Asset allocation and transfer

Hi everyone,

In Kaplan Scheser LOS 11 there is the following case:

Cook has now decided to leave the company to his grandchildren. Cook’s investment manager advises him to restructure the company into two classes of stock, a voting preferred class and a nonvoting common class of stock. The restructuring is done such that the voting preferred shares are worth GBP 30,000,000, and the common stock is worth GBP o. Cook is advised to gift the common stock to a trust that will later disburse the stock to his grandchildren. 1. Assuming this transaction functions as an estate tax freeze, explain how it affects Cook’s current and future tax situation as well as his other goals. Answer 1. The common stock has no current value, so there should be no tax on the initial gift. The preferred stock (with a fixed dividend) is not expected to increase in value as the****company grows. The preferred stock will still be in Cook’s estate and subject to taxes but at a value that is “frozen.” Future growth of the business should increase the value of the common stock, which is not part of Cook’s portfolio or estate. It will be taxed in the trust. I don’t understand the bolded sentence. Preferred stock besides having fixed divdends also rise in value (or fall) over time ! Can someone explain it ?

P = D / r

i have same question. Can someone help me understand how this work?

MrSmart’s answer (from last year) seems to nail it. Unless there’s a change in the required rate of return on preferred stock, it’s price won’t change.