Simple Approximation of the Value of Callable Convertible Preferred Stock

Pradipkumar Ramanlal, Steven V. Mann and William T. Moore

Financial Management, 1996, vol. 25, issue 2

Abstract: We develop an analytic approximation of a model of callable convertible preferred stock that allows for deferred callability and cash dividends on the issuing firm's common stock. Predictions of the analytic approximation and the numerical solution are close, hence we show that the benefit of the method (ease of computation) outweighs the cost (negligible computational error). We also show that model prices predict market price with reasonable accuracy. The model is developed so that it may be solved on a handheld calculator or on a personal computer, making accurate price predictions readily available.

Date: 1996
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