8 Enterprise Storage Company has 540000 shares of cumulative

8. Enterprise Storage Company has 540,000 shares of cumulative preferred stock outstanding, which has a stated dividend of $7.75. It is six years in arrears in its dividend payments. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

How much in total dollars is the company behind in its payments?

Dividend in arrears _________

b. The firm proposes to offer new common stock to the preferred stockholders to wipe out the deficit.

The common stock will pay the following dividends over the next four years:

D₁$1.65

  D₂1.75

  D₃1.85

  D₄1.95

The company anticipates earnings per share after four years will be $4.19 with a P/E ratio of 14.

The common stock will be valued as the present value of future dividends plus the present value of the future stock price after four years. The discount rate used by the investment banker is 10 percent.

Compute the value of the common stock.

c. How many shares of common stock must be issued at the value computed in part b to eliminate the deficit (arrearage) computed in part a  

Number of shares of common stock __________

Appendix B Present value of $1,PVF PV=FV Percent Period 4 Appendlx B (concluded) Percent Period 50% 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.640 0.592 0.549 0.510 0.444 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0512 0.455 0.406 0.364 0.296 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 0.262 0.207 0.165 0.133 0.088 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.210 0.159 0.122 0.095 0.059 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.086 0.056 0.037 0.025 0.012 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 0.035 0.020 0.011 0.006 0.002 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 0.023 0.012 0.006 0.003 0.001 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.014 0.007 0.003 0.002 0 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.012 0.005 0.002 0.001 0 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010 0.004 0.001 0.001 0 0.026 0.020 0.015 0.012 0.009 0.007 0.005 0.004 0.001 0

Solution

a) Arrears of Dividend = 540,000 shares * 7.75 per share * 6 years in default = 25,110,000

b) Value of common stock

Present value of dividends + Present value of stock price

(1) Stock price = 58.66 is determined as ........ Earnings per share / Ke

= 4.19 / ( 1/14) = 58.66

when P/E ratio = 14 times ............ Ke = 1/14  

(2) Discount rates are taken from given tables........... at 10%

Question - c

Number of share to be issued = 25110,000 / 44.22 =  567,843

Year		CF	DF	PV
1	D1	1.65	0.909	1.49985
2	D2	1.75	0.812	1.421
3	D3	1.85	0.731	1.35235
4	D4	1.95	0.659	1.28505
4	Stock price	58.66	0.659	38.65694
				44.22