Co-op Ltd issues converting preference shares with a face value of $15,which convert to ordinary shares on 30 June.The conversion ratio is determined by dividing the face value of the preference share by an amount equal to the price of Co-op ordinary shares on 30 June,less 10 per cent.If the market value of ordinary shares on the conversion is $5.35,at what value will each preference share convert into ordinary shares?
A)$15.00
B)$16.67
C)$5.35
D)$13.50

Question

Quizplus · Accepted Answer

To determine the conversion value, we need to use the following formula:

Conversion ratio = Face value of preference share / (Price of ordinary share on 30 June - 10%)

Given that the face value of the preference share is $15, and the market value of ordinary shares on conversion is $5.35, we can calculate the conversion ratio as follows:

Conversion ratio = $15 / ($5.35 - 10%) = $15 / $4.815 = 3.114

This means that each preference share will convert into 3.114 ordinary shares. To determine the value of each converted share, we divide the market value of ordinary shares on conversion by the conversion ratio:

Value of each converted share = $5.35 / 3.114 = $1.72 (rounded to two decimal places)

Therefore, the correct answer is B) $16.67, which is the total value of the three ordinary shares received per preference share ($1.72 x 3 = $5.16), plus the face value of the preference share ($15).

Co-Op Ltd Issues Converting Preference Shares with a Face Value