Series 7 practice questionhardEquity Securities — Preferred Stock — Scenario
An investor holds 200 shares of $100 par, 5% cumulative convertible preferred stock, convertible at $25. The common stock is trading at $30. If the investor converts, what is the total market value of the common shares received?
- A$20,000
- B$30,000
- C$6,000
- D$24,000✓ Correct answer
Explanation
Why D — $24,000
The conversion ratio is $100 par / $25 conversion price = 4 shares of common per preferred share. With 200 preferred shares, the investor receives 200 x 4 = 800 common shares. At a market price of $30 per common share, the total market value is 800 x $30 = $24,000. Since the parity value ($24,000) exceeds the par value of the preferred ($20,000), conversion is economically favorable.
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