CONVERTIBLES In the summer of 2018, the Gallatin Company was planning 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 $1.07 per share.
The common stock was selling for $21 a share at the time. Management projected earnings for 2018 at $1.40 a share and expected a future growth rate of 12% per year in 2019 and beyond. Tire investment bankers and management agreed that the common stock would continue to sell at 15 times earnings, the current price/earnings ratio.
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