38 lines
2.9 KiB
Plaintext
38 lines
2.9 KiB
Plaintext
621
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This lowering of the call price continues as more dividends are paid, until it finally
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reaches the final call price at maturity. The PERCS holder should not be confused
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this sliding scale of call prices. The sliding call feature is designed to ensure that
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PERC S holder is compensated for not receiving all his "promised" dividends if the
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PERCS should be called prior to maturity.
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Example: As before, XYZ issues a PERCS when the common is at 35. The PERCS
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pays an annual dividend of $2.50 per share as compared to $1 per share on the com
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mon stock. The PERCS has a final call price of 39 dollars per share in three years.
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If XYZ stock should undergo a sudden price advance and rise dramatically in a
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very short period of time, it is possible that the PERCS could be called before any
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dividends are paid at all. In order to compensate the PERCS holder for such an
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c>ecurrence, the initial call price would be set at 43.50 per share. That is, the PERCS
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can't be called unless XYZ trades to a price over 43.50 dollars per share. Notice that
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the difference between the eventual call price of 39 and the initial call price of 43.50
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is 4.50 points, which is also the amount of additional dividends that the PERCS
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would pay over the three-year period. The PER CS pays $2.50 per year and the com
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mon $1 per year, so the difference is $1.50 per year, or $4.50 over three years.
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Once the PERCS dividends begin to be paid, the call price will be reduced to
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reflect that fact. For example, after one year, the call price would be 42, reflecting
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the fact that if the PERCS were not called until a year had passed, the PERCS hold
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er would be losing $3 of additional dividends as compared to the common stock
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($1.50 per year for the remaining two years). Thus, the call price after one year is set
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at the eventual call price, 39, plus the $3 of potential dividend loss, for a total call
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price of 42.
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This example shows how the company uses the sliding call price to compensate
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the PERCS holder for potential dividend loss if the PERCS is called before the
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three-year time to maturity has elapsed. Thus, the PER CS holder will make the same
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dollars of profit - dividends and price appreciation combined - no matter when the
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PERCS is called. In the case of the XYZ PERCS in the example, that total dollar
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profit is $11.50 (see the prior example). Notice that the investor's annualized rate of
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return would be much higher if he were called prior to the eventual maturity date.
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One final point: The call price §lides on a scale as set forth in the prospectus for
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the PERCS. It may be every time a dividend is paid, but more likely it will be daily!
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That is, the present worth of the remaining dividends is added to the final call price
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to calculate the sliding call price daily. Do not be overwhelmed by this feature.
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Remember that it is just a means of giving the PERCS holder his entire "dividend
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premium" if the PERCS is called before maturity. |