Updated for the 2026-2027 CFA® Level I curriculum.
A non-callable, non-convertible preferred stock pays a fixed dividend forever. That fixed, unending payment is what makes it a perpetuity, and perpetuities have a simple valuation formula. This LOS asks you to apply that formula correctly and to know why it works.
After this note, you should be able to calculate intrinsic value from a preferred dividend and a required return, and explain how price moves when either input changes.
Quick Answer
For a non-callable, non-convertible preferred stock with a fixed perpetual dividend, . A higher required return lowers value; a higher dividend raises value.
Key Takeaways About Preferred Stock Valuation
Non-callable, non-convertible preferred stock pays a level dividend with no fixed end date, matching the definition of a perpetuity.
Intrinsic value equals the fixed dividend divided by the required return: .
The required return must be expressed as a decimal, not a percentage, before dividing.
Value and required return move in opposite directions. As required return rises, intrinsic value falls.
The dividend used in the formula is the annual cash dividend, not the stated dividend rate.
This formula does not apply to callable, convertible, or growing preferred stock. Those features change the cash flow stream.
The perpetuity formula assumes the dividend never changes and continues indefinitely.
What You Need to Know for CFA Level I
Explain why a non-callable, non-convertible preferred stock is valued as a perpetuity.
Identify the two required inputs: the fixed annual dividend and the required rate of return.
Calculate intrinsic value using .
Explain how a change in required return or dividend changes the calculated value.
Recognize when the perpetuity formula does not apply.
Why a Non-Callable, Non-Convertible Preferred Stock Is a Perpetuity
A share of preferred stock with no call feature and no conversion option has two defining traits. It pays a fixed dividend, and it has no maturity date. The issuer intends to keep paying that same dividend for as long as the stock exists, and the stock itself has no scheduled end.
This matches the definition of a perpetuity: a series of equal cash flows that continue forever. Because the cash flow stream never changes and never stops, the present value formula for a perpetuity applies directly.
Common stock does not usually fit this pattern because dividends often grow. Bonds do not fit either, because bonds mature and return principal. Non-callable, non-convertible preferred stock is one of the few securities on the Level I exam where the plain perpetuity formula applies without modification.
Dividend and Required-Return Inputs
Two inputs drive the calculation.
#1 The annual preferred dividend ()
This is stated as a dollar amount or as a percentage of par value. If given as a percentage, multiply it by par value to get the dollar dividend. A preferred stock with a par value of $50 and a dividend rate of 4% pays $2.00 per year, not 4% used directly in the formula.
#2 The required rate of return ()
This is the return investors demand for holding this specific preferred stock, given its risk. It reflects the issuer's credit quality and the general level of interest rates. It must be converted from a percentage to a decimal before use. A required return of 7% is entered as 0.07.
Both inputs must match in time period. Level I preferred stock problems use annual dividends and annual required returns, so no additional conversion is needed beyond percentage to decimal.
Intrinsic Value Calculation
The formula is:
Where:
= intrinsic value of the preferred stock today
= fixed annual dividend
= required return, expressed as a decimal
This formula comes directly from the present value of a perpetuity. Since the dividend never grows and never ends, all future dividends discount back to a single, stable value today. There is no growth rate in the denominator because there is no growth to account for.
How Price Reacts to Changes in Required Return or Dividend
Intrinsic value moves inversely with required return. If investors demand a higher return, perhaps because the issuer's credit risk increases or market interest rates rise, the same fixed dividend is worth less today. If required return falls, the same dividend is worth more.
Intrinsic value moves directly with the dividend. A higher fixed dividend increases value, holding required return constant.
This relationship is useful for interpreting exam questions that ask what happens to value after a stated change in interest rates or credit risk, without asking for a full recalculation.
Worked Example
Northfield Utilities issues a non-callable, non-convertible preferred stock with a par value of $100 and a stated dividend rate of 5%. Investors currently require a 6% return on this stock.
Step 1: Find the annual dividend
Step 2: Apply the formula.
At a 6% required return, Northfield's preferred stock is worth $83.33 per share today. This is below par value because the required return exceeds the stated dividend rate as a percentage of par.
Now assume the required return rises to 7% after a credit downgrade.
The dividend did not change, but the higher required return lowered intrinsic value from $83.33 to $71.43. This shows the inverse relationship between required return and value directly, without needing a new dividend forecast.
Common Exam Traps
Using a common-stock growth model for non-growing preferred dividends
Preferred dividends in this LOS do not grow. Applying a Gordon growth model with a nonzero growth rate produces an incorrect, inflated value.
Using a percentage required return without converting it to decimal form
Dividing a dividend by 6 instead of 0.06 produces a value that is off by a factor of 100. Always convert before dividing.
Confusing dividend rate with the cash dividend amount
A 5% dividend rate is not $5 unless par value is $100. Multiply the rate by par value first to get the actual dollar dividend.
Applying the perpetuity formula to a security with features outside the stated LOS
Callable preferred stock can be redeemed early. Convertible preferred stock can become common stock. Both features change the cash flow stream and require a different valuation approach, not the plain perpetuity formula.
Practice Question
Ashford Industrial has outstanding non-callable, non-convertible preferred stock with a par value of $25 and a dividend rate of 8%. The required rate of return on this preferred stock is 10%. What is the intrinsic value per share?
$2.00
$20.00
$31.25
Correct Answer: B
Calculation:
The annual dividend is $2.00. Dividing by the required return of 0.10 gives an intrinsic value of $20.00.
Option A: This is the dividend amount, not the calculated value. The candidate stopped after step one.
Option C: This results from dividing par value by the required return instead of the dividend by the required return.
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FAQs About Preferred Stock Valuation
Is the preferred stock formula the same as the perpetuity formula?
Yes. A non-callable, non-convertible preferred stock pays a fixed dividend with no end date, so it fits the standard perpetuity formula: value equals cash flow divided by required return.
What if the preferred stock has a stated dividend rate instead of a dollar dividend?
Multiply the dividend rate by the par value to find the annual dollar dividend before applying the formula.
Does this formula work for convertible preferred stock?
No. Convertible preferred stock can become common stock, which changes the cash flow stream. This LOS covers non-callable, non-convertible preferred stock only.