The Tsetsekos Company was planning to finance an expansion by means of common stock rather than debt. However, management felt the current $42 per share is too low so they decided to issue a convertible preferred stock which would pay a dividend of $2.10 per share.

a) The conversion ratio will be 1.0, that is, one share of convertible preferred can be converted to one share of common. Therefore, the convertibles 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 a 10% premium? At a 30% premium?

b) Should the preferred stock include a call provision? Why?