Convertibles
In the summer of 2015, the Hadaway Company was planing to finance an expansion with a convertible security. It considered a convertible debenture but feared the burden of fixed interest charges if the common stock price did not rise enough to make conversion attractive. The firm decided on an issue of convertible preferred stock, which would pay a dividend of $1.06 per share.
The common stock was selling for $20 a share at the time. Management projected earning for 2015 at 1.45 a share and expected a future growth rate of 10% per year in 2016 and beyond. The investment bankers and management agreed that the common stock would continue to sell at 14 times earnings, the current price/earnings ratio.
What conversion price should the issuer set? The conversion rate will be 1.0; that is, each share of convertible preferred can be converted into 1 share of common. Therefore, the convertible's par value (as well as the issue price) will be equal to the conversion price of the common. Assume the present price should be in the range between 20% and 30% and the premium is 25%. Round your answer to the nearest cent.