Convertible Preferred Stock - WACC calculation
Hi guys, I am currently working on my Bachelor Thesis. Therefore I need to do a DCF for Allergan plc. Since Allergan has got Convertible Preferred Stock outstanding, I am asking myself how I should account for them in my WACC calcuations. I think there are two possibilities:
- Simply adding up the weighted cost of Convertible Preferred Stock to the weigthed cost of Common Equity and Debt into the WACC
or
- Assume a conversion of the Convertible Preferred Stock into Common Stock and then calculate WACC.
What you think is right?
Thanks in advance!
See what the conversion price is and check against the current share price. If the convertible is "in the money" then assume the security is converted into net shares and calculate WACC with the new ratios etc, if the security is not "in the money" then use the yield and relevant portion of the capital structure.
At least based on what I've been taught.
Yeah given where those prefs are trading I would probably just treat it like debt. If it were within ~10% of conversion price, may want to think about adding it to share count but in this case nah.
You can either base the preferred value on (i) an assumed straight preferred dividend yield then assume the option value as a plug between the PV of the preferred coupon payments and the market value of the convertible preferred or (ii) use the volatility, strike, length, ect inputs to back into the option value then the remaining straight preferred value is the plug (the preferred coupon divided grossed up by [1 - option as % of covert value] is then an approximation for WACC of straight preferred). You can break out WACC into 3 categories then: straight debt, straight convertible preferred, and equity (MV + convert option).
Precedent example link below (although this is for convertible debt not preferred so you need to exclude tax shield):
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0ah…
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