ADM 2350 Study Guide - Risk Premium, Risk-Free Interest Rate, Dividend Discount Model

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Where k = the required return on an equity security. 7. 2 preferred share evaluation: the value of preferred shares can be estimated using the following equation, where. P ps is the market price (or present value), d p is the dividend amount (or payment), is the required rate of return on the preferred shares (or discount rate). and k p. D p k p: the amount of the dividend payment is usually based on a stated par (or face) value and a stated dividend rate, which is similar to the coupon rate on a bond. Example: a preferred share with a par value of and an 8% dividend rate would pay an annual dividend of per year. Chapter 7: equity valuation: rearrange to determine the required rate of return on the preferred shares for a given market price k p= D1=the expected dividend at the end of year 1.

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