SOLUTIONS CHAPTER 17

SOLUTIONS CHAPTER 17 - CHAPTER 17 COMMON STOCK 17-1 (a)...

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CHAPTER 17 COMMON STOCK 17-1 (a) 100,001 shares (b) (c) (d) Thus, the dissident stockholders need 40,000 shares more to elect six directors. 17-2 (a) Annual preferred dividends = 20,000 x $4 = $ 80,000 Dividends in arrears 240,000 Preferred dividends due $320,000 Current earnings $350,000 Less: preferred dividends due 320,000 Common dividends $ 30,000 (b) Current earnings $420,000 Less: preferred dividends 320,000 Earnings available to common stockholders $100,000 x Payout ratio (80%) x 80% Common dividends $ 80,000 17-3 (a) Price per share $25 Premium (40%) 10 Conversion price $35 (b) Face value per bond/Conversion price = $1,000 ÷ $35 = 28.57 (c) Conversion value = 28.57 x $25 = $714.25 (d) 200 bonds x 28.57 shares per bond = 5,714 new shares e (e) The new conversion value = 28.57 x $40 = $1,142.80 If investors require a 8.8 percent premium of conversion price over call price or less, the call may force them to convert their bonds into common stock. 17-4 (a) New shares = $100,000/$50 = 2,000
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Total shares after conversion = 50,000 + 2,000 = 52,000 Before After Conversion Conversion EBIT $500,000 $500,000 Less: interest (6%) 6,000 0 Earnings before taxes 494,000 $500,000 Less: taxes at 50% 247,000 250,000 Earnings after taxes $247,000 $250,000  Number of common shares ÷ 50,000 ÷ 52,000 Earnings per share $4.94 $4.81 (b) The existing common stockholders would control 96.15 percent after conversion (50,000/52,000). Thus, the conversion would dilute the voting control of the firm by 3.85 percent. 17-5 (a) Value of one right = ($35 - $20) / (2+1) = $5 (b) Value of one warrant = ($35 - $30)(2) = $10 (c) Theoretical value of one common share = $35 - $5 = $30 (d) The warrant holders are protected against the dilution effect of the rights offering only if the formula value of the warrants remain the same after the stock sells ex- rights. Thus, the new subscription price of the warrant as follows: $10 = ($30 - y) x 2 y = $25 T 1. Interest payments are assured but preferred dividend payments are not assured. F 2. The issuing company exercises its call option when interest rates increase significantly. F
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SOLUTIONS CHAPTER 17 - CHAPTER 17 COMMON STOCK 17-1 (a)...

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