Problem 20 Preferred Stock Dividends in Arrears (LO5)
Robbins Petroleum Company is four years in arrears on cumulative preferred stock dividends. There are 850,000 preferred shares outstanding, and the annual dividend is $6.50 per share. The vice-president of finance sees no real hope of paying the dividends in arrears. She is devising a plan to compensate the preferred stockholders for 90 percent of the dividends in arrears.
a. how much should the compensation be?
b. Robbins will compensate the preferred stockholders in the form of bonds paying 12 percent interest in a market environment in which the going rate of interest is 14 percent for similar bonds. The bonds will have a 15-year maturity. Using the bond valuation table in Chapter 16 (16-3 on page 500), indicate the market value of a $1,000 par value bond.
c. Based on market value, how many bonds must be issued to provide the compensation determined in part a? (Round to the nearest whole number.)
Comprehensive Problem
Crandall Corporation (rights offering and the impact on shareholders) (LO3)
The Crandall Corporation currently has 100,000 shares outstanding that are selling at $50 per share. It needs to raise $900,000. Net income after taxes is $500,000. Its vice-president of finance and its investment banker have decided on a rights offering, but are not sure how much to discount the subscription price from the current market value. Discounts of 10 percent, 20 percent, and 40 percent have been suggested. Common stock is the sole means of financing for the Crandall Corporation.
a. For each discount, determine the subscription price, the number of shares to be issued, and the number of rights required to purchase one share. (Round to one place after the decimal point where necessary.)
b. Determine the value of one right under each of the plans. (Round to two places after the decimal point.)
c. Compute the earnings per share before and immediately after the rights offering under a 10 percent discount from the market price.
d. by what percentage has the number of shares outstanding increased?
e. Stockholder X has 100 shares before the rights offering and participated by buying 20 new shares. Compute his total claim to earnings both before and after the rights offering (that is, multiply shares by the eatings per share figures computed in part c).
f. Should Stockholder X be satisfied with this claim over a longer period of time?
