Calculate the lowest price of a share

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Reference no: EM1368000

A corporation has issued convertible preferred stock to its venture shareholders. Every share of preferred stock is convertible into 0.75 shares of common stock and pays an yearly 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).

Reference no: EM1368000

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