Question

Robbins Petroleum Company is four years in arrears on cumulative preferred stock dividends. There are 860,000 preferred shares outstanding, and the annual dividend is $7.50 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? (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 12 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.)
  

Answer 1

(a)-Compensation

Compensation = [Number of Preferred Stock x Dividend per share x Number of arrear years] x Percentage of Payment

= [860,000 Shares x $7.50 per share x 4 Years] x 90%

= $25,800,000 x 90%

= $23,220,000

“Compensation = $23,220,000”

(2)-Bond Value

The Price of the Bond = Present Value of the Coupon payments + Present Value of Face Value

= $120[PVIFA 12%, 15 Years] + $1,000[PVIF 12%, 15 Years]

= [$120 x 6.811] + [$1,000 x 0.183]

= $817 + $183

= $1,000 per bond

“The Bond Value = $1,000 per Bond”

(c)-The number of bonds to be issued to provide the compensation determined in part a

Bonds Issued = The Amount of Compensation x Bond Value

= $23,220,000 / $1,000 per bond

= 23,220 Bonds

“Bonds Issued = 23,220 Bonds”