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Paralegal Exam Prep

Category - Miscellaneous

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What does a conversion right do?
  1. Allows a creditor to get paid prior to shareholders if the corporation liquidates.
  2. Allows a creditor to compel a corporation to convert debt owed to shares.
  3. Allows a shareholder to convert preferred stock into common stock.
  4. Allows shares to be purchased at a discounted price.
  5. Allows stock options to be exercised.
Explanation
Answer: C. A conversion right allows a shareholder to convert preferred stock into common stock. Conversion rights can be voluntary or automatic. With automatic conversion rights there are certain situations in which the preferred stock will automatically convert.
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