Assignment 4, Question 1: Convertible preferred stock Valerian Corp. convertible
ID: 2801151 • Letter: A
Question
Assignment 4, Question 1:
Convertible preferred stock
Valerian Corp. convertible preferred stock has a fixed conversion ratio of 5 common shares per 1 share of preferred stock. The preferred stock pays a dividend of $7.00
per share per year. The common stock currently sells for $45 per share and pays a dividend of $2.00 per share per year.
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 $226 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?
Explanation / Answer
Answer A: Conversion value = conversion ratio * Stock price conversion value
Conversion value = 5 * $45 = $225
Answer B : Nope. looking at the value shouldnt convert as the value with out converting $226 is more then converting in to common shares $225.
Answer C: No benefit on converting in to common shares. loss of $1 on converting is one of the reasons.
other reason could be on converting you might get less dividend, which is not the case on converting here, you will get $10 ( 5 * $2) where as only $7 for preferred stock