Yietd on Preferred Stock

Substituting current market price (P0) for intrinsic value (V) in preferred stock valuation, we have

P0 = Dp/kp

where Dp is still the stated annual dividend per share of preferred stock, but kp is now the market required return for this stock, or simply the yield on preferred stock. Rearranging terms allows us to solve directly for the yield on preferred stock:

kp = Dp/P0

To illustrate, assume that the current market price per share of Acme Zarf Company's 10 percent, $100-par-value preferred stock is $91.25. Acme's preferred stock is therefore priced to provide a yield of

kp = $ 10/S91.25 = 10.96%