A company issued a $100 preferred equity redemption cumulative stock with an annual dividend of $8. The
Question:
A company issued a $100 preferred equity redemption cumulative stock with an annual dividend of $8. The preferred may be exchanged for two shares of common stock as long as the price of the stock is $60 or less. If the price of the stock exceeds $60, the number of shares is adjusted so the investor receives stock worth $60 a share. The preferred stock currently sells for $95. The common stock sells for $40 and does not pay a dividend.
a) What is the value of the exchangeable preferred stock based on the current value of the common stock?
b) Is the preferred stock selling for a premium over its value as common stock?
c) What may explain the existence of the premium?
d) What is the preferred stock’s current yield?
e) What will be the value of the preferred stock as stock if the common stock sells for $30, $40, $50, $60, $70, and $80?
f) If at the end of four years the common stock sells for $75 a share, which alternative generated the higher annualized return?
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Step by Step Answer:
a Since the convertible preferred stock may be exchanged for 2 shares it is worth 80 in terms of stock 40 x 2 b The premium 95 80 15 c Possible explan...View the full answer
