Question

Robbins Petroleum Company is five years in arrears on cumulative preferred stock dividends. There are 890,000 preferred shares outstanding, and the annual dividend is $7.00 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 80 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 8 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). Total Dividends in arrears = Dividend per share x No. of Shares x Years n arrears

= $7 x 890,000 x 5 = $31,150,000

Compensation = 0.80 x $31,150,000 = $24,920,000

b). To find the bond price, we need to put the following values in the financial calculator:

INPUT	15	8		120	1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-1,342.38

So, Bond's Price = $1,342.38

c). Number of bonds to provide compensation = Compensation / Bond Value

= $24,920,000 / $1,342.38 = 18,564