Share
Explore BrainMass

Equity Capital

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).

Solution Preview

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.)

Since each share of preferred stock is convertible into 0.75 shares of common stock, and the preferred stock sells for $7. ...

Solution Summary

The common shares are explained.

$2.19