Investors expect higher returns on their investment that are directly linked up with the profitability of the companies. Therefore, companies try to attract investors through different types of dividends and incentives. Dividend is not always paid in cash form rather it depends upon policy of the company, its financial health and other market conditions. In addition to fixed dividend, preferred shareholders are sometimes offered extra dividend or a conversion right (common shares are offered against each preferred share) depending upon profitability and liquidity situation of a company.

Suppose Azhar Textiles has announced their dividend policy for preferred shareholders to get four common shares for one preferred share. If you hold 1000 preferred shares of Azhar Textiles with a face value of Rs. 100 each share, in which of the following two situations, you will take the conversion offer and why?

1. If Common shares are selling @ Rs. 30 per share in the market
2. If Common shares are selling @ Rs. 20 per share in the market

Required:

1. Calculate Market conversion price
2. Calculate profit or loss on conversion if common shares are selling @ Rs. 30 per share
3. Calculate profit or loss on conversion if common shares are selling @ Rs. 20 per share
4. Based on above calculated profit or loss, in which situation you will take conversion offer and why?

Answer rating: 100% (QA)

1 The market conversion price is the price at which one preferred share can be converted into common shares In this case the conversion ratio is 41 wh... View the full answer