Question

Ozark Distributing Company is primarily engaged in the wholesale distribution of consumer products in the Ozark Mountain regions. The following disclosure note appeared in the company’s 2018 annual report:

Note 5. Convertible Preferred Stock (in part):
The Company has the following Convertible Preferred Stock outstanding as of September 2018:

Date of issuance:	June	17, 2015
Optionally redeemable beginning:	June	18, 2017
Par value (gross proceeds):	$	6,900,000
Number of shares:		230,000
Liquidation preference per share:	$	30
Conversion price per share:	$	35.70
Number of common shares in which to be converted:		193,277
Dividend rate:		6.855	%

The Preferred Stock is convertible at any time by the holders into a number of shares of Ozark’s common stock equal to the number of preferred shares being converted times a fraction equal to $30 divided by the conversion price. The conversion prices for the Preferred Stock are subject to customary adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock. Cumulative dividends for the Preferred Stock are payable in arrears, when, as and if declared by the Board of Directors, on March 31, June 30, September 30, and December 31 of each year.

The Preferred Stock is optionally redeemable by the Company beginning on various dates, as listed above, at redemption prices equal to 110% of the liquidation preference. The redemption prices decrease 1% annually thereafter until the redemption price equals the liquidation preference after which date it remains the liquidation preference.

Required:
1. What amount of dividends is paid annually to a preferred shareholder owning 200 shares of the Series A preferred stock?
2. If dividends are not paid in 2019 and 2020, but are paid in 2021, what amount of dividends will the shareholder receive?
3. If the investor chooses to convert the shares in 2019, how many shares of common stock will the investor receive for his/her 200 shares?
4. If Ozark chooses to redeem the shares on June 18, 2019, what amount will the investor be paid for his/her 200 shares?

Ozark Distributing Company is primarily engaged in the wholesale distribution of consumer products in the Ozark Mountain regions. The following disclosure note appeared in the company’s 2018 annual report:

Note 5. Convertible Preferred Stock (in part):
The Company has the following Convertible Preferred Stock outstanding as of September 2018:

Date of issuance:	June	17, 2015
Optionally redeemable beginning:	June	18, 2017
Par value (gross proceeds):	$	6,900,000
Number of shares:		230,000
Liquidation preference per share:	$	30
Conversion price per share:	$	35.70
Number of common shares in which to be converted:		193,277
Dividend rate:		6.855	%

The Preferred Stock is convertible at any time by the holders into a number of shares of Ozark’s common stock equal to the number of preferred shares being converted times a fraction equal to $30 divided by the conversion price. The conversion prices for the Preferred Stock are subject to customary adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock. Cumulative dividends for the Preferred Stock are payable in arrears, when, as and if declared by the Board of Directors, on March 31, June 30, September 30, and December 31 of each year.

The Preferred Stock is optionally redeemable by the Company beginning on various dates, as listed above, at redemption prices equal to 110% of the liquidation preference. The redemption prices decrease 1% annually thereafter until the redemption price equals the liquidation preference after which date it remains the liquidation preference.

Required:
1. What amount of dividends is paid annually to a preferred shareholder owning 200 shares of the Series A preferred stock?
2. If dividends are not paid in 2019 and 2020, but are paid in 2021, what amount of dividends will the shareholder receive?
3. If the investor chooses to convert the shares in 2019, how many shares of common stock will the investor receive for his/her 200 shares?
4. If Ozark chooses to redeem the shares on June 18, 2019, what amount will the investor be paid for his/her 200 shares?

Answer 1

1) Par value of preferred shares = $6,900,000

Dividend rate = 6.855%

Total annual preferred dividend = $472,995

Number of preferred shares = 230,000

Dividend per preferred shares = $2.0565

Annual preferred dividend 200 shares = $2.0565*200 = $411.3

2) Dividend paid in 2021:

If dividend is not paid in 2019 and 2020 but paid in 2021, the amount of dividend that shareholders will receive :-

$411.3 * 3 years = $1,233.9

Note: Preference shares are cumulative, thus the amount of unpaid or arrear of dividend will be paid in 2021.

3) In case the investor chooses to convert the shares in 2019, how many shares of common stock will the investor receive for his/her 200 shares:

Number of convertible preference shares owned = 200

Conversion factor = $30 / $35.70

Number of common shares received = 200 * ($30 / $35.70) = 168.08 or 168 shares.

The .08 fraction share can be paid in cash equal to current market price per share times .08

4)  If Ozark chooses to redeem the shares on June 18, 2019, what amount will the investor be paid for his/her 200 shares?

Liquidation preference per share amount = $30

Redemption price on June 18,2019 = $30 * 110% = $33

Percent reduction in Redemption price = 1% ( one year after initial redemption)

Redemption price on June, 18,2019 = $33 * 99% =$32.67

For 200 shares = $32.67 * 200 = $6,534