Convertible Premiums

The Tsetsekos Company was planning to finance an expansion. The principal executives of the company all agreed that an industrial company such as theirs should

finance growth by means of common stock rather than by debt. However, they felt that the current $$48$ per share price of the company's common stock did not reflect

its true worth, so they decided to sell a convertible security. They considered a convertible debenture but feared the burden of fixed interest charges if the common

stock did not rise enough in price to make conversion attractive. They decided on an issue of convertible preferred stock, which would pay a dividend of $$1\mathrm{.}70$ per

share.

a$.$ The conversion ratio will be $1\mathrm{.}0$ ; that is$,$ each share of convertible preferred can be converted into a single share of common. Therefore, the convertible's par value

$($and also the issue price$)$ will be equal to the conversion price, which in turn will be determined as a premium $($i$.$e$.,$ the percentage by which the conversion price

exceeds the stock price$)$ over the current market price of the common stock. What will the conversion price be if it is set at an $11\%$ premium? Round your answer

to the nearest cent.

$

At a $25\%$ premium? Round your answer to the nearest cent.

$

b$.$ Should the preferred stock include a call provision?

I. No$,$ the company does not want to force conversion under any circumstance.

II$.$ Yes, to be able to force conversion if the market rises above the call price.

III. Yes, to be able to force conversion if the market falls below the call price.