Question

A corporation has issued $100 par, 6 1/2% cumulative convertible preferred stock, callable at par. The preferred is convertible into 2 shares of common stock. Currently, the preferred stock is trading at $100 while the common stock is trading at $50. If a customer buys 100 preferred shares, converts, and then sells the common stock in the market, the profit or loss is (ignoring commissions):

Answer 1

Answer:

$0

Explanation:

Amount paid by the customer for 100 preferred stock = 100 * $100 = $10,000

Number of preferred stock when converted to common stock = 100 * 2 = 200 shares

Revenue from selling the 200 shares = 200 * $50 = $10,000

Profit or loss to customer = Revenue from selling the 200 shares - Amount paid by the customer for 100 preferred stock = $10,000 - $10,000 = $0

Therefore, the customer made no profit nor loss.