For every question, please write down each main step before you obtain the final

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For every question, please write down each main step before you obtain the final answer. Correct final answer with incorrect related work (calculation) or without any work may receive 0 point. On the contrary, incorrect final answer with correct related work (calculation) will receive partial credits.

Question 2 – Convertible Preferred Stock [4 points]: 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.

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

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.)

Explanation / Answer

ANSWER 1 :DIVIDEND PER SHARE ON THE PREFERRED STOCK = 5% OF 100 = $5

ANSWER 2 : AS FACE VALUE OF PREFERRED STOCK IS $100 AND IT IS TO BE CONVERTED INTO 4 SHARES OF COMMON STOCK

THE CONVERSION PRICE IS = FACE VALUE/NO OF SHARES OF COMMON STOCK

THE CONVERSION PRICE IS = 100/4 = $ 25

AS THE CONVERSION PRICE IS $25, INVESTOR SHOULD CONSIDER IT CONVERTING INTO STOCK WHEN THE MARKET PRICES GOES ABOVE $25, THAT IS WHEN STOCK TRADES ABOVE $25 IN MARKET

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