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Slav-nsk [51]
4 years ago
11

A $50 par value convertible preferred stock is convertible into 5 shares (exercise price of $10). The preferred is selling for $

75, and the price of the common stock is $12. If the price of the common stock rises to $20, what is the minimum percentage price increase the holder of the preferred stock should experience?
Business
1 answer:
m_a_m_a [10]4 years ago
7 0

Answer:

33.3%

Explanation:

Cost of one common stock =$12

Cost of 5 common stock = $60

Price of preferred stock = $75, which is more than $60

Hence, it would not make sense to convert the preferred stock shared into common stock as of now.

Now, if P is $20, then price of 5 stocks:

= 5 × 20

= $100

Hence, the Preferred stock price must increase to at least $100 otherwise there will be arbitrage opportunity.

Increase in price:

= price of 5 stocks - Price of preferred stock

= $100 - $75

= $25

% increase = (Increase in price ÷ Price of preferred stock) × 100

                  = (25 ÷ 75) × 100

                  = 33.3%

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The annualized holding period return for this investment is 13.17%.

<h3>Define annualized total return.</h3>

The fund's annual return is calculated using the annualized total return to show the rate of return required to generate a cumulative return. A holding period is the duration of time an investor keeps an investment in their portfolio or the interval between buying and selling a security.

The geometric average of yearly returns for each year during the investment period is known as the annualized return. When comparing two investments with different time periods or examining an investment's performance over time, the annualized return can be helpful.

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4 0
1 year ago
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Answer:

$64.76

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The current share price can be determined by calculating the present value of the dividend

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Present value can be calculated using a financial calculator

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I = 10.7

PV = 64.76

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

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