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Chapter 5: 1BP-b (page 566)

Folic Acid Inc. has \(20 million in earnings, pays \)2.75 million in interest to bondholders, and pays $1.80 million in dividends to preferred stockholders.

b. What are the common stockholders’ legal, enforceable claims to dividends?

Short Answer

Expert verified

The common shareholders do not have the right to demand dividends from the company.

Step by step solution

01

Meaning of the dividend on shares

The dividend refers to the reward given by the company to the shareholders for the money invested by them.These dividends can be paid as cash or additional shares to the shareholders.

02

The common stockholder’s claims to dividend

The common stockholders do not have any claim on the company’s residual income.These stockholders cannot legally enforce the company to provide them a dividend. It is the company’s decision whether they want to give dividend to the common shareholders or not.

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Most popular questions from this chapter

The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows:

In \( millions
In \) millions

Current assets

\(70

Current liabilities

\)30

Fixed assets

\(70

Long-term liabilities

\)30

Total liabilities

\(60

Stockholder’s equity

\)80

Total assets

\(140

Total stockholder’s equity and liabilities

\)140

The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.

c. Compute total debt to total assets on the original and revised balance sheets.

Explain the role of financial intermediaries in the flow of funds through the three-sector economy.

The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of \(6,910,000 in the current year. The company is considering the issuance of 1 million additional shares that can only be issued at \)30 per share.

a. Assume that Hamilton Corporation Company can earn 7.0 percent on the proceeds. Calculate the earnings per share.

b. Should the new issue be undertaken based on earnings per share?

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

a. How many shares of stock must be sold to net $21,120,000? (Note: No out-of-pocket costs must be considered in this problem.)

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

d. Compute the EPS and the price (P/E stays constant) after the new production facility begins to produce a profit.
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