Scenario:A company has issued convertible preferred stock to its venture investors. Each share of preferred stock is convertible into 0.75 shares of common stock and pays an annual cash dividend of $0.13.
Your tasks:
1. If each share of preferred stock sells for a market value of $7, what's the lowest price that a share of the company's common stock should be selling for? (Ignore the preferred stock's dividend yield.)
2. If a share of the company's common stock is actually selling for $6, what are the implied conversion terms?
3. Also, explain how the common stock could be trading at a lower price ($6/share) than the preferred stock ($7/share).
Present the calculations and your analysis as a two-page report. Submit your report to the appropriate.
Grading Criteria
Maximum Points
Accurately calculated the lowest price for a share of the company's common stock.
10
Accurately calculated the implied conversion terms.
Analyzed the reasons for the common stock to trade at a price lower than the preferred stock.
Presented a structured document free of spelling and grammatical errors.
5
Properly cited sources using APA format.
Total:
40
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