Question

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?

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.