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): $ 2,500,000 Number of shares: 100,000 Liquidation preference per share: $ 25.00 Conversion price per share: $ 30.31 Number of common shares in which to be converted: 82,481 Dividend rate: 6.785 % 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 $25.00 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 112% 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 100 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 100 shares? 4. If Ozark chooses to redeem the shares on June 18, 2019, what amount will the investor be paid for his/her 100 shares?

Answer 1

Part 1)

The amount of dividends paid annually to a preferred shareholder owning 100 shares of the Series A preferred stock is determined as below:

Amount of Dividends = Base Amount of Preferred Stock*Shares Owned by Preferred Shareholder*Dividend Rate

Here, Base Amount of Preferred Stock = 2,500,000/100,000 = $25, Shares Owned by Preferred Shareholder = 100 and Dividend Rate = 6.785 %

Using these values in the above formula, we get,

Amount of Annual Dividends = 25*100*6.785 % = $169.625 (answer for Part 1)

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Part 2)

As the preferred shares are cumulative, any dividend arrears will be accumulated. The total amount of dividends the shareholder will receive in 2021 is calculated as below:

Amount of Dividends Received in 2021 = Dividend for Year 2019 + Dividend for 2020 + Dividend for 2021 = 169.625*3 = $508.875 (answer for Part 2)

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Part 3)

The number shares of common stock the investor will receive for his/her 100 shares is determined as below:

Number of Common Shares Received by Investor = Shares Owned by Preferred Shareholder*Number of Common Shares in which to be Converted/Number of Shares

Here, Shares Owned by Preferred Shareholder = 100, Number of Common Shares in which to be Converted = 82,481 and Number of Shares = 100,000

Using these values in the above formula, we get,

Number of Common Shares Received by Investor = 100*82,481/100,000 = $82.48 (answer for Part 3)

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Part 4)

The amount that will be paid to the investor on his/her 100 shares is arrived as follows:

Amount Paid to Investor = Number of Shares*Redemption Price

Here, Number of Shares = 100 and Redemption Price = 25*112%*(100% - 1% - 1%) = $27.44

Using these values in the above formula, we get,

Amount Paid to Investor = 100*27.44 = $2,744 (answer for Part 4)