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ABC Corporation 6% preferred stock is convertible at $20. ABC Common trades at $25/share. What is the parity price of ABC preferred stock?
Correct Answer: C
Rationale: First we must take the convertible price and divide it into the par value for the preferred stock to find out how many shares of common stock would be received for one share of preferred stock. $100/$20 = 5 shares of common for each share of preferred. Then we must multiple the number of common shares times the price of the common stock. 5 shares * $25/share = $125/share. The parity price of ABC preferred is $125/share.
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