A hybrid between common stock and a bond Fixed dividend payment Must be paid before common stock dividends.
Preferred stock involves a fixed or defined dividend payment, forever.
Has residual claim 2. Dividends are not promised or guaranteed 3. When we buy a common stock, we usually expect to get dividends and appreciation in price. Based on the above equations, the future cash flows consist of D1 and P1, in other words dividends plus a future price. Well, we could just substitute for P 1 in the above equation to see that P1 is the present value of D 2 and P 2 .