Finance an expansion with convertible preferred stock

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Reference no: EM131497363

The Contrell Company is planning to finance an expansion with convertible preferred stock. Each share will pay a dividend of $2.10 per share. The price of the company's common stock is currently $42. The conversion ratio will be 1.0, i.e., each share of convertible preferred can be converted into one share of common. The convertible's par value (and also the issue price) will be equal to the conversion price. The conversion price will be a premium over the current market price of the common stock.

a. Calculate the conversion price if it is set at a 10% premium.

b. Calculate the conversion price if it is set at a 30% premium

c. If the company expects its growth rate to be high, would it be better to use a premium of 10% or a 30%? Why?

d. If the company expects its growth rate to be low, would it be better to use a premium of 10% or a 30%? Why?

e. Should the convertible preferred stock include a call provision? Why or why not?

Reference no: EM131497363

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