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CFA Level I · CFA Level I Exam · Equity Jurisdictions, Classes, and the Voting Process

A company has 1,000 convertible preference shares outstanding, each with a par value of 100 and convertible into 4 ordinary shares. The ordinary shares trade at 30. The preference shares trade at 140. The conversion value of one preference share and the most appropriate conclusion are:

Conversion value equals 4 ordinary shares times 30, which is 120. Because the preference share trades at 140, it sits at a premium of 20 over conversion value, reflecting the preference dividend and downside protection. Par value of 100 is irrelevant to conversion value.

  1. Aconversion value is 120; the preference share trades at a premium to conversion valueCorrect
  2. Bconversion value is 120; the preference share trades at a discount to conversion value
  3. Cconversion value is 100; the preference share trades at a premium to conversion value

Explanation

Conversion value = 4 x 30 = 120, not par of 100. Market price of 140 exceeds 120, so it trades at a premium of 20, reflecting the fixed dividend and downside protection. The discount option misreads the comparison, and the 100 option uses par.

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