Describe usual pattern of cash flows for share of preferred stock? How does the market fidn out the value of a share of preferred stock, given these promised cash flows?
Preferred stock contains no maturity date hence, it has no maturity value. Its future cash payments are dividend payments which are paid to preferred stockholders at regular time intervals for so long as they (or their heirs) own the stock. Cash payments from preferred stock dividends are scheduled to continue forever. In order to value preferred stock, we adapt the discounted cash flow model to reflect that preferred stock dividends are perpetuity.