Question

Mean Green Acid Inc. has $40 million in earnings, pays $5 million in interest to bondholders, and $3 million in dividends to preferred stockholders.
  
What are the common stockholders’ residual claims to earnings? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places (e.g., $1.23 million should be entered as "1.23").)
  

The Donut Corporation has been experiencing declining earnings but has just announced a 50 percent salary increase for its top executives. A dissident group of stockholders wants to oust the existing board of directors. There are currently 15 directors and 31,000 shares of stock outstanding. Mr. Wright, the president of the company, has the full support of the existing board. The dissident stockholders control proxies for 12,001 shares. Mr. Wright is worried about losing his job.

a-1. Under cumulative voting procedures, how many directors can the dissident stockholders elect with the proxies they now hold? (Do not round intermediate calculations. Round your answer down to the nearest whole number.)
  

a-2. How many directors could they elect under majority rule with these proxies?
  

	One
	Two
	Three
	Four
	None

b. How many shares (or proxies) are needed to elect eight directors under cumulative voting? (Do not round intermediate calculations. Round your answer up to the nearest whole number.)
  

Rust Pipe Co. was established in 1994. Four years later the company went public. At that time, Robert Rust, the original owner, decided to establish two classes of stock. The first represents Class A founders' stock and is entitled to seven votes per share. The normally traded common stock, designated as Class B, is entitled to one vote per share. In late 2010, Mr. Stone, an investor, was considering purchasing shares in Rust Pipe Co. While he knew the existence of founders’ shares were not often present in other companies, he decided to buy the shares anyway because of a new technology Rust Pipe had developed to improve the flow of liquids through pipes.

Of the 1,650,000 total shares currently outstanding, the original founder's family owns 52,225 shares.

What is the percentage of the founder's family votes to Class B votes? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  

Mr. and Mrs. Anderson own five shares of Magic Tricks Corporation's common stock. The market value of the stock is $60. The Andersons also have $42 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $42 for each five shares currently owned (based on five rights). (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

a. What is the value of a right?
  

b. What is the value of the Andersons’ portfolio before the rights offering? (Portfolio in this question represents stock plus cash.)
  

c-1. Compute the diluted value (ex-rights) per share.
  

c-2. If the Andersons participate in the rights offering, what will be the value of their portfolio, based on the diluted value (ex-rights) of the stock?
  

d. If they sell their two rights but keep their stock at its diluted value and hold on to their cash, what will be the value of their portfolio?
  

Robbins Petroleum Company is four years in arrears on cumulative preferred stock dividends. There are 720,000 preferred shares outstanding, and the annual dividend is $9.50 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.)
  

Barnes Air Conditioning Inc. has two classes of preferred stock: floating rate preferred stock and straight (normal) preferred stock. Both issues have a par value of $100. The floating-rate preferred stock pays an annual dividend yield of 7 percent, and the straight preferred stock pays 12 percent. Since the issuance of the two securities, interest rates have gone up by 2.00 percent for each issue. Both securities will pay their year-end dividend today.

a. What is the price of the floating-rate preferred stock most likely to be? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

b. What is the price of the straight preferred stock likely to be? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

Answer 1

1. Mean Green Acid Inc.

                                                (Million)

Earnings:                                    $40

-Interest to Bondholders                $5

-Prefered Stock Dividends             $3

Common Stock Residual Claim    $32

As per above calculations Common Stock Residual Claim is defined as Net earnings minus any Interest and Prefered stock Dividends. So Common Stock Residual Claim will be $32 Million

A-1:

Given information:

Increase in Donut Corporation Top Executive Salary = 50%

Number of Directors = 31

Number of Shareholders outstanding = 31000

Dissidents Shareholders Control Proxies = 12001

Number of Directors that Can be elected can be calculated as follows:

(12001-1)*(31+1)/31000 = 12.38

12 Directors can be elected by Dissendent Stock holders under cumulative voting

A-2 -

However No Directors can be elected under majority rule as board controls 50% of shares