Hey, please show work. I don\'t just want the answer, I want to be able to teach
ID: 2641684 • Letter: H
Question
Hey, please show work. I don't just want the answer, I want to be able to teach myself and study this.
The question comes from pearsons MyFinanceLab and reads:
"Valerian Corp. convertible preferred stock has a fixed conversion ratio of 4 common shares per 1 share of preferred stock. The preferred stock pays a dividend of $5.00 per share. The common stock currently sells for $25 per share and pays a dividend of $2.00 per share per year.
It follows with:
a. Judging on the basis of the conversion ratio and the price of the common shares, what is the current conversion value of each preferred share?
b. If the preferred shares are selling at $104 each, should an investor convert the preferred shares to common shares?
c. What factors might cause an investor not to convert from preferred to common stock.
I'd really appreciate the help, finance is not my strong suit.
Explanation / Answer
Conversion value of each prefered share = $104 (Preferred share) / 4 (Common shares)= $26
Yes, investor should should convert the preferred shares to common shares because one prefered share of $104 pays $5 divident while one common share of $25 pays $2 of dividend. Hence as per the ratio of 1:4 four common shares will pay $8 divident, $3 more than a preferred dividend.
An investor may not wish to convert from prefered to common stock, Because preferred shareholders get dividends even if company is not earning profits. Moreover, only preferred shares have conversion option but common stock can not be converted to other stock options.