Value of preferred stock

An investor gathered the following data:

Par value of preferred stock offered with a 6% dividend rate $100

Company’s sustainable growth rate 5%
Yield on comparable preferred stock issues 11.5%
Investor’s marginal tax rate 30%

The value of the company’s preferred stock is closest to:


Answer is c as they use D0 (6/11.5%)=52.17 instead of D1 (6*1.05)/11.5%=54.78

Why is that? I read in the forum that the reason is that the growth is constant (?) and therefore 0 (/ but the rationale does not convince me…

In other instances we use the sustainable growth rate as basis to calculate the forward Dividend… so why not here?


Dividends on preferred stock are fixed; here, at 6%.

1 Like