Four years ago, Ideal Solutions issued convertible preferred stock with a par va

Question

Four years ago, Ideal Solutions issued convertible preferred stock with a par value of $100 and a stated dividend of 5 percent. Each share of preferred stock can be converted to four shares of common stock at the option of the investor. When issued, the preferred stock was sold at par value such that Ideal raised $2.5 million to fund expansion of its operations.

a) What is the annual dividend per share on the preferred stock?

b) What is the conversion price of the preferred stock? When should an investor consider converting into common stock? (Ignore taxes and other costs that might be associated with conversion.)

c) If all investors convert their preferred stock to common stock, how many new shares of common stock will Ideal have outstanding?

Explanation / Answer

a) dividend = 100 * 0.05 = 5

b)

price = 100/4 = 25

c)

no of shares = 2500000 * 4/100 = 100000

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