Growth and value of stock

CFA Level I
#21

map1, what if a question asks for a preferred whose dividend grows by 1% per year?

#22

I am so confused/tired!!! what is the price of the preferred finally?

#23

preferred is FIXED, it doesn’t grow.

#24

delta9 Wrote: ------------------------------------------------------- > I am so confused/tired!!! what is the price of the > preferred finally? 100

#25

$100

#26

> preferred is FIXED, it doesn’t grow. nothing will stop CFAI from asking though :slight_smile:

#27

Dreary Wrote: ------------------------------------------------------- > map1, what if a question asks for a preferred > whose dividend grows by 1% per year? typically preferred divs. don’t grow…

#28

I don’t think so:)) preferred is fix, is cummulative and has seniority over common stock, stop with that already:))

#29

Glad you asked, look on page 488 of Vol.3, it talks about preferred having variable interest rates which it said buyers prefer this type since they resemble money-market type investments.

#30

That’s an super-extra one phrase exception that CFAi text does not develop further anywhere in the text. Check the valuation of preferred stock in Equity and Fixed income, if you can find the DDM model there for preferred stock valuation, in any shape or form, let me know, maybe I miss something.

#31

map1, they don’t have to develop further anything…if it’s in the text, it’s fair game. Cheers.

#32

Are div yld and k the same? B/c doesn’t div yield = Do/Po?

#33

yes, b/c that’s what it will cost you to issue preferred.

#34

Thanks.

#35

Dreary, if preferred has a variable rate, it is treated as a callable short-term liability and not equity investment. As such, applying Gordon Growth Model is not meaningful, and variable prefs should be valued as floaters.

#36

Preferreds have infinite dividend, like equity. Bonds have limited time. Where did you read that preferred is treated like bonds in valuation, FisherSU?