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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## This note was uploaded on 02/20/2012 for the course FIN 7023 taught by Professor Wald during the Spring '12 term at The University of Texas at San Antonio- San Antonio.

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

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