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 theirs should finance growth by means of common stock rather than by debt. However, they felt that the current $48 per share price of the company's common stock did not reflect its true worth, so they decided to sell a 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 $1.70 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 convertible's par value (and also the issue price) will be equal to the conversion price, which in turn will be determined as a premium (i.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 an 11% premium? Round your answer to the nearest cent. $ At a 25% premium? Round your answer to the nearest cent. $ b. Should the preferred stock include a call provision? I. No, the company does not want to force conversion under any circumstance. II. Yes, to be able to force conversion if the market rises above the call price. III. Yes, to be able to force conversion if the market falls below the call price. -Select- ✓
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 theirs should finance growth by means of common stock rather than by debt. However, they felt that the current $48 per share price of the company's common stock did not reflect its true worth, so they decided to sell a 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 $1.70 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 convertible's par value (and also the issue price) will be equal to the conversion price, which in turn will be determined as a premium (i.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 an 11% premium? Round your answer to the nearest cent. $ At a 25% premium? Round your answer to the nearest cent. $ b. Should the preferred stock include a call provision? I. No, the company does not want to force conversion under any circumstance. II. Yes, to be able to force conversion if the market rises above the call price. III. Yes, to be able to force conversion if the market falls below the call price. -Select- ✓
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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 theirs should
finance growth by means of common stock rather than by debt. However, they felt that the current $48 per share price of the company's common stock did not reflect
its true worth, so they decided to sell a 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 $1.70 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 convertible's par value
(and also the issue price) will be equal to the conversion price, which in turn will be determined as a premium (i.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 an 11% premium? Round your answer
to the nearest cent.
$
At a 25% premium? Round your answer to the nearest cent.
$
b. Should the preferred stock include a call provision?
I. No, the company does not want to force conversion under any circumstance.
II. Yes, to be able to force conversion if the market rises above the call price.
III. Yes, to be able to force conversion if the market falls below the call price.
-Select- ✓
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