Question

"A corporation has issued $100 par, 8% cumulative convertible preferred stock, callable at par. The preferred is convertible into 1.4 shares of common stock. Currently, the preferred stock is trading at $102 while the common stock is trading at $75.50. The corporation calls the preferred stock at par plus accrued dividends of $2 per share. If a customer buys 100 preferred shares, converts, and then sells the common stock in the market, the profit is (ignoring commissions):"

Answer 1

$370 (or 3.63%)

Step-by-step explanation:

An investor purchases 100 preferred stocks and pays 100 x $102 = $10,200. He then converts the 100 preferred stocks into 140 common stocks. Then the 140 common stocks are sold at 140 x $75.50 = $10,570.

The total profit = $10,570 - $10,200 = $370 or $370/$10,200 = 3.63%.