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During negotiations between Samantha Jones and John Thompson, Jones proposes using a hybrid security called...

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Finance

During negotiations between Samantha Jones and John Thompson, Jones proposes using a hybrid security called participating preferred stock. A participating preferred security enables the holder to convert the security to common stock at the previously agreed upon conversion rate and to have the principle amount repaid. In standard convertible preferred stock, the holder gets the maximum of the liquidation value or the value if converted into common stock.

A. What share of the company will Samantha Jones require today if her required rate of return is 50% and she uses a participating preferred stock instead of a standard convertible preferred Security?

B. If the company has 1,000,000 shares outstanding before the private placement, how many share should Samantha purchase? What price per share should she agree to pay if her required rate of return is 50%?

C. How does utilizing participating versus standard preferred change John and Samanthas perception of the risk and reward profile of this deal?

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