Final answer:
In the event of a 5% stock dividend, an anti-dilutive covenant means that the conversion ratio for preferred stock is increased to preserve the shareholders' proportional ownership, while the conversion price would typically remain unadjusted or even decreased if it were to be changed.
Step-by-step explanation:
When a corporation declares a 5% stock dividend, preferred stock that is issued with an "anti-dilutive" covenant will require an adjustment to preserve the value for the preferred stockholders as to not dilute their investment. An anti-dilutive covenant ensures that the current preferred shareholders maintain their proportional ownership and rights, despite the issuing of additional shares or in this case, a stock dividend.
Statement I: The conversion ratio is increased - This statement is TRUE. The conversion ratio must be adjusted upward so that preferred stockholders can maintain the equivalent percentage of ownership after the dividend is paid. For example, if the original conversion ratio is 1:1, and a 5% stock dividend is declared, the new ratio might become 1:1.05 to ensure their percentage of ownership doesn't decrease.
Statement II: The conversion price is increased - This statement is FALSE. An increase in the conversion price would make each share of preferred stock convertible into fewer shares of common stock, which is contrary to the purpose of an anti-dilutive provision. In fact, adjusting the conversion price would typically mean reducing it if that method were used to maintain proportionate ownership, which is usually not the case when compared to adjusting the conversion ratio.
Statements III and IV: These mirror the inverse of statements I and II and as such, III is FALSE while IV would be TRUE if the method was to adjust conversion price, which again is not the common approach compared to ratio adjustments in such scenarios.