Preferred stock dividends in arrears (LO5)Robbins Petroleum Company is four year
ID: 2699410 • Letter: P
Question
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.%u2003
a.%u2003How much should the compensation be?%u2003
b.%u2003Robbins 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 (Table 16%u20133), indicate the market value of a $1,000 par value bond.%u2003
c.%u2003Based on market value, how many bonds must be issued to provide the compensation determined in part a? (Round to the nearest whole number.)
Information
Dividend per share---------------------------------------------$6.50
Shares outstanding--------------------------------------------850,000
Years in arrears-------------------------------------------------4
Compensation percentage-----------------------------------90%
Please provide formulas in Excel
Explanation / Answer
a) compnesation = 6.50 * 850000 * 4 * 0.90 = 19890000
b)bond value = 120 * PVIFA(14%,15) + 1000 * PVIF(14%,15)
= 875.54
c)compensation = 19890000
bond value = 875.54
number of bonds = 19890/975.54 = 22717