Task1: Convertible preferred stock Valerian Corp. convertible preferred stock has the fixed conversion ratio of 5 common shares per 1 share of the preferred stock. The preferred stock pays a dividend of $10.00 per share per year. The common stock currently sells for $20.00 per share and pays a dividend of $1.00 per share each year.
problem1. Judging on the basis of conversion ratio and the price of common shares, what is the current conversion value of each and every preferred share?
problem2. When the preferred shares are selling at $96.00 each, should the investor convert the preferred shares to common shares?
problem3. What factors may cause an investor not to convert from preferred to the common stock?
Task2. Common stock valuation—Zero growth Scotto Manufacturing is the mature firm in the machine tool component industry. The firm’s most recent common stock dividend was $2.40 per share. Due to its maturity as well as its constant sales and earnings, the firm’s management feels that dividends will remain at the current level for foreseeable prospect.
problem1. When the required return is 12%, what will be the value of a Scotto’s common stock?
problem2. When the firm’s risk as perceived by market participants suddenly rises, causing the required return to get higher to 20%, what will be the common stock value?
problem3. Judging on the basis of your findings in parts a as well as b, what impact does risk have on the value? Describe.