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NEW QUESTION: 1
Bubba buys a $4 convertible preferred with a $50 par value that is exchangeable for common stock at
4 7.50. If the preferred stock is trading at 52 and the common stock at 51, Bubba determines that the
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A. overpriced and will quickly decline
B. underpriced and should rise quickly
C. going to be called when the common stock price is $52
D. selling at a 4% premium over conversion value
Answer: B
Explanation:
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.
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