Question

Analyzing Convertible Preferred Stock
Xerox Corp. reports the following stockholders' equity information in its 10-K report.

Shareholders' Equity		December 31
(in millions, except par value)		2015	2014
Series A convertible preferred stock		$349	$349
Common stock, $1 par value		$1,013	$1,124
Additional paid-in capital		3,017	4,283
Treasury stock, at cost		-	(105)
Retained earnings		9,797	9,646
Accumulated other comprehensive loss		(4,531)	(4,048)
Xerox shareholders' equity		$9,296	$10,900

Preferred Stock As of December 31, 2015, we had one class of preferred stock outstanding. We are authorized to issue approximately 22 million shares of cumulative preferred stock, $1.00 par value per share.
Series A Convertible Preferred Stock: We have issued 300,000 shares of Series A convertible perpetual preferred stock with an aggregate liquidation preference of $300 and an initial fair value of $349. The convertible preferred stock pays quarterly cash dividends at a rate of 8% per year ($24 per year). Each share of convertible preferred stock is convertible at any time, at the option of the holder, into 89.8876 shares of common stock for a total of 26,966 thousand shares (reflecting an initial conversion price of approximately $11.125 per share of common stock), subject to customary anti-dilution adjustments.
Common Stock We have 1.75 billion authorized shares of common stock, $1.00 par value per share. At December 31, 2015, 102 million shares were reserved for issuance under our incentive compensation plans, 48 million shares were reserved for debt to equity exchanges and 27 million shares were reserved for conversion of the Series A convertible preferred stock.

Required
a. At December 31, 2015, Xerox reports $349 million of 8% Series A Convertible Preferred stock. What is the dollar amount of dividends that Xerox must pay on this stock (assume a par value of $110 per share)?
$Answer


b. Describe the effects that will occur to Xerox’s balance sheet and its income statement when the Series A Convertible Preferred stock is converted.

On the balance sheet, the preferred stock balance is eliminated and retained earnings is increased by the same amount.

On the balance sheet, the preferred stock balance is eliminated and total contributed capital is increased by the same amount.

On the balance sheet, the preferred stock balance is eliminated and treasury stock is decreased by the same amount.

On the balance sheet, the preferred stock balance is eliminated and accumulated other comprehensive income is increased by the same amount.

Answer 1

1. The dividend is paid on the par value of shares

Number of outstanding Series A preferred shares = 300,000

Hence, dividend = 300,000 * 110 * 9% = $ 2,970,000

2. On the balance sheet, the preferred stock balance is eliminated and the total contributed capital is increased by the same amount.          

This is because on conversion, the amount of preferred stock will be debited cancelling the existing preferred stock account and crediting common stock creating new flows to said account. This will result in increase in contributed capital.