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Conversion Value / WACC/ Terminal Value

Exercise1: A share of a venture's preferred stock is convertible into 1.5 shares of its common stock. The dividend on the preferred stock is $.50 per share. If the firm's common stock is currently trading at $9.75, what is the conversion value of a share of the preferred stock? What would be the dividend yield on the preferred stock based on its conversion value?

Exercise2 Calculate the weighted average cost of capital (WACC) based on the following information : the capital structure weights are 50% debt and 50% equity; the interest rate on debt is 10%; the required return to equity holders is 20%; and the tax rate is 30%

Exercise 3 Estimate a venture's terminal value based on the following information: current year's net income = $20,000; next year's expected cash flow = $26,000;constant future growth rate = 7%; and venture investors' required rate of return = 20%

Solution Preview

Exercise1: A share of a venture's preferred stock is convertible into 1.5 shares of its common stock. The dividend on the preferred stock is $.50 per share. If the firm's common stock is currently trading at $9.75, what is the conversion value of a share of the preferred stock? What would be the dividend yield on the preferred stock based on its conversion ...

Solution Summary

The solution explains three problems - calculating the conversion value of a preferred stock, calculating the WACC and calculating the terminal value.

$2.19