Is the valuation of Preferred Stock similar to that of Bonds? Why or why not? Explain.

Question

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Answer 1

Answer #1

SIMILARITIES	DISSIMILARITIES
Both is calculated as the present value of future expected cash flows discounted at required rate	Bonds make payment for definite period whereas preference shares make perpetual payments
Make definite payments at equal intervals	Bond vale also includes redemption price, whereas value of preference shares is calculated as -annual dividend/required return
Priority in payment over common shareholders	Interest on bond have tax benefit whereas as dividend on preferred stock is not a tax deductible expense.

Answer 2

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