chapter 7: equity valuation part 2 formulas for preferred shares Flashcards Preview

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Flashcards in chapter 7: equity valuation part 2 formulas for preferred shares Deck (9)
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1

determine the required return on equity for preferred shares

K= RF + risk premium

K = require return on equity
RF = risk free rate of return (real rate + expected inflation)

- like a perpetual annuity

2

Estimate the value of the preferred share

Pps = Dp / Kp

Pps = PV or market price (selling price)

Dp = dividend amount

(face value x stated dividend rate)

Kp = required rate of return or discount rate

3

Determine the required rate of return on preferred shares

Kp = Dp / Pps

Kp = required rate of return

Dp = dividend amount

Pps = PV or market price (selling price)

4

determine the preferred share price

dividends paid per share / required return

5

determine dividends paid paid per share

price x required rate of return

6

determine dividend rate

dividend paid per share / par value

7

determine required return

dividend paid per share / price

8

determine par value

dividend paid per share / dividend rate

9

determine risk premium

1. calculate required return

price / (dividend rate x par) x 100

2. required return - risk free rate = risk premium