Final answer:
Preferred stock is not valued the same as common stock with a zero dividend growth rate. Preferred stock has a fixed dividend payment and the value is determined using the formula: Value of Preferred Stock = Dividend / Required Rate of Return.
Step-by-step explanation:
The statement is false. Preferred stock and common stock are different types of stocks that have different characteristics and valuations. Preferred stock is a type of equity security that has a fixed dividend payment and takes priority over common stock when it comes to receiving dividends or in the event of liquidation. On the other hand, common stock is the most basic form of ownership in a company and can have variable dividend payments.
When valuing preferred stock with a zero dividend growth rate, the formula used is: Value of Preferred Stock = Dividend / Required Rate of Return. The required rate of return is the return expected by investors for taking on the risk associated with the preferred stock. If the dividend is fixed and the required rate of return remains the same, the value of preferred stock will remain constant.
For example, if a preferred stock has a fixed annual dividend of $2 and the required rate of return is 5%, the value of the preferred stock would be $40 (=$2 / 5%). Even if the dividend growth rate is zero, the value of preferred stock would not be the same as common stock since common stock's valuation is based on expected future dividends and potential capital gains.