Two years ago you bought 100 shares of Big Bubba convertible preferred stock at $25 per share. The preferred stock had an annual dividend of $2.125 per share, and a total of $3.19 in dividends per share have been paid so far. Today the company announced that the stock is redeemable for $26.70 plus accrued and unpaid dividends, for a total of $27.76. Alternatively, holders may convert their shares of preferred stock at a conversion rate of 1.6393 shares of Big Bubba common stock for each share of preferred stock. If the closing price of Big Bubba common stock is $27.50, what is your holding period return on the conversion option (round % to 2 decimals)?

Question

Quizplus · Accepted Answer

The conversion option gives you 1.6393 shares of common stock per preferred share. At $27.50 per common share, this equals $45.08 per preferred share. The initial investment was $25 per share, so the holding period return is (($45.08 - $25) / $25) * 100% = 80.32%.

Two Years Ago You Bought 100 Shares of Big Bubba