The CCC Venture has issued convertible preferred stock to its venture investors.

Question

The CCC Venture has issued convertible preferred stock to its venture investors. Each share of preferred stock is convertible into 0.80 share of common stock and pays an annual cash dividend of $0.25.

A. If each share of preferred stock has a market value of $4, what is the minimum price that a share of the CCC Ventures common stock should be selling for (ignore the dividend yield on the preferred stock)?

B. If a share of the CCC Ventures common stock is actually trading at $3 per share, what are the implied conversion terms? Given the above actual conversion terms, explain how the common stock could be trading at $3 per share while the preferred stock is trading at $4 per share.

Explanation / Answer

A. If each share of preferred stock has a market value of $4, what is the minimum price that a share of the CCC Ventures common stock should be selling for (ignore the dividend yield on the preferred stock)?

Minimum price of common stock should be selling for = Market Value of preferred stock /Conversion Factor

Minimum price of common stock should be selling for = 4/0.8

Minimum price of common stock should be selling for = $ 5

B. If a share of the CCC Ventures common stock is actually trading at $3 per share, what are the implied conversion terms? Given the above actual conversion terms, explain how the common stock could be trading at $3 per share while the preferred stock is trading at $4 per share.

Implied conversion terms = Market Value of preferred stock/Market Value of Common stock

Implied conversion terms = 4/3

Implied conversion terms = 1.3333

The common stock could be trading at $3 per share while the preferred stock is trading at $4 per share where the conversion terms is 0.8 ,it is possible when there is higher dividend in compaare to preferred stock dividend and the expected market value of common stock at the time of conversion should be higher and As the time passes the value of stock changes, time is the important factor while valuing stock.In this case the term not provided the convertible preferred stock is to be convertible into Common Stock on specific date, It is the right which a preferred stock may apply or even can sell before that date .

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