Question

Robbins Petroleum Company is three years in arrears on cumulative preferred stock dividends. There are 870,000 preferred shares outstanding, and the annual dividend is $8.50 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 70 percent of the dividends in arrears.

a. How much should the compensation be? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g. $1,234,000).)
  

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 16-2, indicate the market value of a $1,000 par value bond. (Round your answer to the nearest whole number.)
  

c. Based on market value, how many bonds must be issued to provide the compensation determined in part a? (Do not round intermediate calculations and round your answer to the nearest whole number.)
  

rev: 03_23_2017_QC_CS-83666

Answer 1

a.Total Prefererd stock dividends in 1 year = 8.50*870,000 = 7,395,000

Total arrears for 3 years = 7,395,000*3 = 22,185,000

Since 70% of dividends in arreas, that would be =0.7*22,185,000 = $15,529,500

b. Price of the bond assuming semi-annual coupons =PV(rate,nper,pmt,fv) in excel where rate =0.14/2, nper=15*2,pmt =120/2 and fv =1000

Price of the bond =PV(0.14/2,15*2,120/2,1000) = $875.91

c. Number of Bonds to be issued = 15,529,500/875.91 = 17,729.51 = 17,730 Bonds