Bubba buys a $4 convertible preferred with a $50 par value that is exchangeable for common stock at 47.50. If the preferred stock is trading at 52 and the common stock at 51, Bubba determines that the preferred stock is:
A)overpriced and will quickly decline
B)selling at a 4% premium over conversion value
C)underpriced and should rise quickly
D)going to be called when the common stock price is $52

Question

Quizplus · Accepted Answer

underpriced and should rise quickly. The parity price for the common stock is about $49.38 - determined as:50 / 47.50 = 1.053
52 / 1.053 = 49.38 Since the common stock is trading at 51, the preferred is underpriced.

Bubba Buys a $4 Convertible Preferred with a $50 Par