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?

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.