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Robbins Petroleum Company is six years in arrears on cumulative preferred stock dividends. There are 770,000...

Robbins Petroleum Company is six years in arrears on cumulative preferred stock dividends. There are 770,000 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 80 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 14 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.)

Expert Solution

(a)-Amount of compensation to the preferred stockholders

Compensation = [Number of Preferred Stock x Dividend per share x Number of arrear years] x Percentage of Payment

= [770,000 Shares x $9.50 per share x 6 Years] x 80%

= $43,890,000 x 80%

= $35,112,000

“The Amount of compensation to the preferred stockholders would be $35,112,000”

(2)-Market value of a $1,000 par value bond

The Market Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the bond = $1,000

Annual Coupon Amount = $120 [$1,000 x 12%]

Annual Yield to Maturity = 14%

Maturity Period = 15 Years

The Market Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $120[PVIFA 14%, 15 Years] + $1,000[PVIF 14%, 15 Years]

= [$120 x 6.14217] + [$1,000 x .14010]

= $737 + $140

= $877 per Bond

“The Bond Value = $877 per Bond”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

(c)-Bonds Issued

Bonds Issued = The Amount of Compensation x Bond Value

= $35,112,000 / $877 per Bond

= 40,036 Bonds

“Bonds Issued = 40,036 Bonds”

jeff jeffy answered 1 year ago

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