The Company is planning to finance an expansion with convertible preferred stock. Each share will pay a dividend of $1.50 per share. The price of the company's common stock is currently $35. The conversion ratio will be 1.0, i.e., each share of convertible preferred can be converted into one share of common. The convertible's par value (and also the issue price) will be equal to the conversion price. The conversion price will be a premium over the current market price of the common stock.
a) If the company expects its growth rate to be high, would it be better to use a premium of 20% or 35%?
b) If the company expects its growth rate to be low, would it be better to use a premium of 20% or 35%? Why?