There is no single valuation formula for stocks similar to that for bonds because no proceeds can be expected with any degree of certainty. There are three methods which depend on the confidence one can have predicting future dividends. As pointed out in Chapter 12 Section A-2, payment of dividends is never assured for common shareholders, but most companies follow policies of stable dividends. These stable dividend policies allow an approximation of the general value formula. In the case of preferred stocks, the calculation of value can be identical to that of bonds if preferred dividends are guaranteed and the preferred stock has a finite life (which some preferred stock do because they are considered temporary equity, as argued in Chapter 12 Section C). If the preferred stock has rights to convert into common shares, or to participate in earnings, then these extra benefits must be evaluated separately for what they represent, and added to the preferred stock valuation based on preferred dividends alone.

See review questions Q-3D.1 and Q-3D.2.