Convertible Preferred Stock

What is Convertible Preferred Stock?

Convertible preferred stock is a type of preferred stock which in addition to an entitlement to a dividend, also includes an option to be converted into a fixed number of shares in the common stock of a business.

Suppose for example, an investor owns 7% convertible preference stock with a par value of 100 and a conversion ratio of 8.

Before conversion, the stockholder receives a preferred stock divided calculated as follows:

Preferred dividend = Dividend rate x Par value
Preferred dividend = 7% x 100 = 7

The conversion ratio is the number of shares in common stock that the investor receives in return for each share in the convertible preferred shares. In this example, the investor will receive 8 shares in common stock in return for each share of convertible preferred stock.

The investor can now decide based on the relative prices of the preferred and common stock, whether it is beneficial to retain the preferred stock with its fixed 7% dividend each year or
convert the preferred stock to common stock in the business.

For further information see the Wikipedia Convertible Preference Stock definition.

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Last modified January 12th, 2018 by Team

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