Final answer:
The theoretical value of a share of preferred stock (PSV) is determined using the concept of present discounted value (PDV). PDV calculates the amount you should be willing to pay in the present for a stream of expected future payments. To determine the value, you add up the present values of the future profits earned by the company and divide it by the number of shares.
Step-by-step explanation:
To determine the theoretical value of a share of preferred stock (PSV), the concept of present discounted value (PDV) is used. PDV is the amount you should be willing to pay in the present for a stream of expected future payments. When applying PDV to a stock, you add up all the present values for the different time periods to get a final answer.
Each present value calculation takes into account the expected future profits earned by the company and the interest rate. The final step is to divide the PDV of total profits by the number of shares to get the price per share.