Question

A corporation has issued $100 par, 8% cumulative convertible preferred stock, callable at par. The preferred is convertible into 1.4 shares of common stock. Currently, the preferred stock is trading at $102 while the common stock is trading at $75.50. The corporation calls the preferred stock at par plus accrued dividends of $2 per share. The corporation is making n(n):

a.tender offer
b.forced conversion
c.advance refunding
d.simultaneous transaction

Answer 1

Answer:

C. Advance Refunding

Explanation:

Advance refunding is the situation that involves issuance of new bonds to repay issued bonds previously owed. Advance refunding is only possible after ninety days have elapsed. The major aim of advance refunding is towards reducing the issuer's debt. In the case of this question, the preferred shares can be converted to common shares. This is done in order to pay previously owed issued bonds.