The Tsetsekos Company was planning to finance an expansion in the summer of 2004. The principal executives

Question:

The Tsetsekos Company was planning to finance an expansion in the summer of 2004. The principal executives of the company all agreed that an industrial company such as theirs should finance growth by means of common stock rather than by debt. However, they felt that the price of the company’s common stock did not reflect its true worth, so they decided to sell a convertible security. They considered a convertible debenture but feared the burden of fixed interest charges if the common stock did not rise in price to make conversion attractive. They decided on an issue of convertible preferred stock, which would pay a dividend of $2.10 per share. The common stock was selling for $42 a share at the time. Management projected earnings for 2004 at $3 a share and expected a future growth rate of 10 percent a year in 2005 and beyond. It was agreed by the investment bankers and the management that the common stock would sell at 14 times earnings, the current price/earnings ratio.

a. What conversion price should be set by the issuer? The conversion ratio will be 1.0; that is, each share of convertible preferred can be converted into 1 share of common. Therefore, the convertible’s par value (and also the issue price) will be equal to the conversion price, which, in turn, will be determined as a percentage over the current market price of the common. Your answer will be a guess, but make it a reasonable one.

b. Should the preferred stock include a call provision? Why?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...