Question

Check My Work eBook Problem Walk-Through 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 their should finance growth by means of common stock rather than by debt. However, they felt that the current $35 per share price of the company's common stock did not reflectits true worth, so they decided to 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 $1.60 per share a. The conversion ratio will be 1.0; that is, each share of convertible preferred can be converted into a single 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 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 10% premium? Round your answer to the nearest cent. At a 20% premium? Round your answer to the nearest cent. b. Should the preferred stock include a call provision? 1. Yes, to be able to force conversion of the market falls below the call price. 11. No, the company does not want to force conversion under any circumstance 111. Yes, to be able to force conversion if the market ses above the car price -Select-

Answer 1

a). Conversion price with a premium of 10% = current share price*(1+ premium) = 35*(1+10%) = 38.50

b). Conversion price with a premium of 20% = 35*(1+20%) = 38.50

c). Yes, the preferred stock should include a call provision so that it can be called when market price rises above the call price so that it can be reissued at a lower cost. (Statement III)