Preferred stock is a hybrid security that is an equity holding but behaves more like a bond, as far as stock price movements. Preferred stock has no voting rights, and in the event of bankruptcy, preferred shareholder claims follow bondholders and precede common shareholders. Preferred dividends are contractual, in that while the stated dividend may not be paid in a given year due to low earnings and cash flows, all prior years' dividends must be paid-up to preferred stockholders before any dividends are paid to common stockholders. Consequently, preferred stockholders can generally count on a certain amount of income over a period of years, although some years' income may be made up in later years.
Years ago, preferred stock was issued as a perpetuity- it never matured. However, in recent decades, preferred stock is issued with a maturity date as would a bond. This practice assists in security valuation for financial and insurance companies whose assets must be assessed relative to its liabilities.
Apply this concept.
A firm issued a preferred stock which matures in 30 years and carries a maturity value of $45. The dividend is $4 per year over the 30 year period. The current market discount rate for this stock is 8%. What is the value of the preferred share?
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