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Problem - Preferred Stock Characteristics - 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 $0.50 per share.
A. If the firm's common stock is currently trading at $9.75, what is the conversion value of a share of the preferred stock?
B. What would be the dividend yield on the preferred stock based on its conversion value?
C. What explanation would you give if the venture's preferred stock currently trades at $15? What would be the dividend yield?
D. If the venture doubles the number of shares of its common stock that are outstanding (and cuts its stock price in half) but increases the conversion terms on its preferred stock to 2.5 shares of common stock, what would be the conversion value of a share of preferred stock after the new common stock issue? What would be the dividend yield on the preferred stock based on this new conversion value?
E. If the venture increased its common stock offering by 50 percent (instead of 100 percent), what common stock conversion ratio would be needed on a share of preferred stock to keep its conversion value the same as it was before the new common stock issue?
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