5.26. Convertible preferred stock. Valerian Corp. has a preferred share issue outstanding that is convertible into common shares. Each preferred share can be converted into five common shares at the option of the holder. The preferred stock pays a dividend of $10 per share per year. The common stock currently sells for $20 per share and pays a dividend of $1 per share per year.
a. Based on the conversion ratio and the price of the common shares, what is the minimum value of each preferred share?
b. If the preferred shares are selling at $96 each, should an investor convert the preferred shares to common shares?
c. What factors might cause an investor not to convert from preferred to common?
Please show calculations in excel and word if possible
5.22. Rights Offering. To raise the financing required for the expansion of its production facilities, Mercury Corporation just announced a rights offering. The firm currently has 15 million common shares outstanding which are trading for $18.75 on the Toronto Stock Exchange. The rights offering will see the company issue 0.5 rights for each share owned. The subscription price for the rights offering is $15 and the investor will require 5 rights to buy one share.
a. How many new common shares will the company issue assuming all shareholders take advantage of the rights offering?
b. How much financing will be raised through the rights offering?
c. Once the rights offering is announced, what will happen with the rights?
d. On the day the rights offering is announced, wha tis the value of one of the Mercury Corporation rights?
This solution provides a step-by-step tutorial in Excel to calculate components of convertible preferred stocks using conversion ratio, price of common shares, and factors affecting investment. It also touches on the concepts of rights offerings and common shares.