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Convertible preferred dividend $2.10 Common stock $42.00 Conversion 1.00 Coversion premium 10% Conversion price with 10%...

Convertible preferred dividend $2.10

Common stock $42.00

Conversion 1.00

Coversion premium 10%

Conversion price with 10% premium $46.20.

Conversion price 30%

Conversion price with 30% is $54.60.

a, If the company expects its growth rate to be high, would it be better to use a premium of 10% or a 30%? Why?

b. If the company expects its growth rate to be low, would it be better to use a premium of 10% or a 30%? Why?

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Answer #1

a. If the growth rate is expected to be high, the company can use the lower conversion premium of 10%. It is because when the company is expected to grow at high growth rates, investors are anyways attracted to high growth companies and a low conversion rate can be used since investors would like a high growth business.

b. If the growth rate is expected to be lower, the company can use the higher conversion premium of 30%. It is because when the company is expected to grow at low growth rates, investors are not attracted to the company and the higher premium of 30% will be factor in attracting investor to buy stock of the low growth company.

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