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. If the price of the stock is less than $40, the number of shares is adjusted so the investor receives stock worth $30 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

$10, $20, $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?

g) If at the end of four years the common stock sells for $45 a share, which alternative generated the higher annualized return?

h) If the price of the common stock declines to $25, what is the maximum possible loss experienced by the preferred stock excluding the dividend? If the dividend is included, what is the total loss or gain from the preferred stock?