Convertible preferred stock valerian corp convertible preffered sotck has a fixed conversion ratio of 5 share per 1 of preferred stock. the preferred stock pays a dividend of!10 per share year. the common stock currently sells for $20 per share and pays a dividend of $1 per share per year.

a. judging on the basis of the conversion ratio and the price of teh common shares, what is the current conversion value of each preferred share?

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Business

Marcus Wu

27 March, 00:49

Convertible preferred stock valerian corp convertible preffered sotck has a fixed conversion ratio of 5 share per 1 of preferred stock. the preferred stock pays a dividend of!10 per share year. the common stock currently sells for $20 per share and pays a dividend of $1 per share per year.

a. judging on the basis of the conversion ratio and the price of teh common shares, what is the current conversion value of each preferred share?

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Hugh Reilly · Answer 1

Conversion value = conversion ratio x stock price = 5 x $20 = $100

Based on judgement of the preferred stock price versus the conversion value the investor should change. If converted, the investor has $100 of value against only $96 if she keeps ownership of the preferred stock. If the investor changes to common stock she will start receiving $1.00 per share per year of dividends. Conversion will make $5.00 per year of total dividends. If the investor keeps the preferred they will obtain $10.00 per year of dividends. This extra $5.00 per year in dividends may reason the investor to retain the preferred up until forced to change through use of the call feature.