MENU
The preferred stock of Greatest Technology Corporation has a $100 par and is convertible into four shares of common stock. The preferred is trading at 104.50. The preferred is callable at 101. If the common stock price is presently 27.89, which of the following actions would be a successful arbitrage:
Suggested Answer: A
Get Premium Series-7 Questions
as Interactive Web-Based Practice Test or PDF
Real Exam Format
Detailed Explanations
Instant Access
Get Your Practice Test
$0.45. Since treasury stock does not receive dividends, divide $450,000 by the outstanding 100,000 shares to arrive at $0.45 per share.
32 comments · newest first
TE
Tegan
11 months ago
Really? Is it guaranteed that they'll call it?
CO
Cora
11 months ago
Wow, I didn't realize the preferred could be called at 101!
BU
Buffy
12 months ago
Not so sure about that, option D seems risky.
DA
Darrel
12 months ago
I think option B makes the most sense here.
JO
Joesph
1 year ago
Preferred stock is at 104.50, common stock at 27.89.
BR
Brittni
1 year ago
I’m leaning towards option C, but I’m not confident. It seems like hedging could be a safer approach, even if it’s not strictly arbitrage.
LA
Launa
1 year ago
I practiced a similar question where we had to analyze the conversion value. I feel like option A could be risky since it involves shorting the common stock.
VE
Verda
1 year ago
I'm not entirely sure, but I remember something about the conversion feature of preferred stock being important. Maybe option D could work if the stock gets called?
TI
Tina
1 year ago
I think option B might be the right choice since it involves buying the preferred stock and shorting the common stock, which could lock in some profits.
EM
Emile
1 year ago
Okay, I think I've got it. The preferred stock is trading at a premium to the value of the underlying common stock, so buying the preferred and shorting the common should be a winning strategy. Time to put my finance skills to the test!
RE
Reta
1 year ago
I'm not totally sure about this one. There are a lot of moving parts to consider. I'll need to review the concepts and formulas to make sure I understand it fully.
GO
Goldie
1 year ago
Option B seems like the way to go - purchase the preferred stock and sell the appropriate amount of common stock short. That should lock in a risk-free profit.
HE
Helene
1 year ago
Hmm, I'm a bit confused by the details here. I'll need to carefully work through the numbers to figure out the best approach.
HI
Hillary
1 year ago
This looks like a classic arbitrage opportunity. I think the key is to focus on the relationship between the preferred stock and the common stock.
EL
Elbert
1 year ago
I'm a bit confused by all the identity provider and authentication protocol options. I'll need to review my notes on Salesforce identity management to make sure I understand the differences between these approaches.
HE
Heike
1 year ago
What do you call a stock that can't make up its mind? A flip-flop! Anyway, I think I'll go with option B. Let's do this!
CA
Cary
1 year ago
Hold up, is that a pun I see? 'Short exempt'? Haha, these exam questions are getting more creative every year!
EL
Elbert
1 year ago
Ooh, this is a tricky one! I think I'll go with option B. Gotta love that arbitrage opportunity!
ST
Stevie
1 year ago
I'm not sure about option C or D, they don't seem like good arbitrage strategies.
ZA
Zachary
1 year ago
I think option A could also work well in this situation.
ST
Stephaine
1 year ago
I agree, option B seems like the best choice for arbitrage.
EL
Eladia
2 years ago
I'm not sure about the 'short exempt' rules, so I think I'll play it safe with option C. Can't go wrong with a good ol' hedge, right?
JE
Jettie
1 year ago
I agree with you on option C. It's always good to hedge against market risk.
ES
Esteban
1 year ago
I'm leaning towards option A. Buying 400 shares of common stock and selling 100 shares of preferred stock sounds like a solid plan.
LO
Loren
1 year ago
I think I'll go with option B. Buying the preferred stock and selling the common stock short seems like a good move.
DO
Dorcas
1 year ago
Option C sounds like a safe bet. Hedging is always a good strategy.
AN
Anisha
2 years ago
The preferred stock is trading at a premium to its call price, so option D is the way to go. Guaranteed profit and no risk!
SH
Shawnna
1 year ago
D) purchase the preferred stock and let it be called, which is inevitable at these market prices
LU
Luis
2 years ago
A) purchase 400 shares of common stock and sell 100 shares of preferred stock as ''short exempt'' (that is, the sale is exempt from the uptick rule)
EM
Emmett
2 years ago
But selling short exempt can lead to successful arbitrage in this scenario.
LO
Louisa
2 years ago
I disagree, I believe the answer is A.
EM
Emmett
2 years ago
I think the answer is B.