Chapter 5: 19BP-a (page 570)

Robbins Petroleum Company is four years in arrears on cumulative preferred stock dividends. There are 690,000 preferred shares outstanding, and the annual dividend is $6.50 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?

Short Answer

Expert verified

The compensation should be $14,352,000.

Step by step solution

Information provided in the question

Annual dividend to be paid = $6.50 per share

Preferred stock outstanding = 690,000

Time for which dividends have to be paid = 4 years

percentage of compensation to be paid = 80%

Calculation of compensation

The compensation will be $14,352,000.

$\begin{matrix} Dividend in arrears = Annual dividend per share \\ \times Shares outstanding \\ \times Time for which arrears are due \\ = $ 6.50 \times 690, 000 \times 4 \\ = $ 17, 940, 000 \end{matrix}$

$\begin{matrix} Compensation = Dividend in arrears \\ \times Percentage of arrears to be compensated \\ = $ 17, 940, 000 \times 80 % \\ = $ 14, 352, 000 \end{matrix}$

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Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	$8,500,000

Short Answer

Step by step solution

Information provided in the question

Calculation of compensation

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