Enterprise Storage Company has 550,000 shares of cumulative preferred stock outstanding, which has a stated dividend...

Enterprise Storage Company has 550,000 shares of cumulative preferred stock outstanding, which has a stated dividend of $8.75. It is six years in arrears in its dividend payments. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. How much in total dollars is the company behind in its payments? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)

b. The firm proposes to offer new common stock to the preferred stockholders to wipe out the deficit. The common stock will pay the following dividends over the next four years: D1 $1.70 D2 1.80 D3 1.90 D4 2.00 The company anticipates earnings per share after four years will be $4.20 with a P/E ratio of 15. The common stock will be valued as the present value of future dividends plus the present value of the future stock price after four years. The discount rate used by the investment banker is 11 percent. Compute the value of the common stock. (Do not round intermediate calculations and round your answer to 2 decimal places.)

c. How many shares of common stock must be issued at the value computed in part b to eliminate the deficit (arrearage) computed in part a? (Do not round intermediate calculations and round your answer to the nearest whole share.)

Solutions

Expert Solution


Solution A
Total Preferred Stock	550,000
Per share dividend	8.75
Total dividend for 6 years in arrears	=5500008.756
	28,875,000

Solution B

Year	Cashflow	PV factor	PV
1	1.7	0.901	1.53
2	1.8	0.812	1.46
3	1.9	0.731	1.39
4	2	0.659	1.32
4	63	0.659	41.50
		Share price	47.20

Share price after 4 years
EPS	4.2
PE ratio	15
Price	=EPS* PE ratio
	=4.2*15	63

Solution C

Payment in arrears	28,875,000
Eqiuty share price today	47.20

No of shares issued	=28875000/47.20
	611,758

jeff jeffy answered 1 year ago

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