Managerial Finance gitman e12 ch07.docVIP

?Solutions to Problems P7-1. LG 2: Authorized and available shares Basic a. Maximum shares available for sale Authorized shares 2,000,000 Less: Shares outstanding 1,400,000 Available shares ???600,000 b. The firm requires an additional 200,000 authorized shares to raise the necessary funds at $60 per share. c. Aspin must amend its corporate charter to authorize the issuance of additional shares. P7-2. LG 2: Preferred dividends Intermediate a. $8.80 per year or $2.20 per quarter b. $2.20 For a noncumulative preferred only the latest dividend has to be paid before dividends can be paid on common stock. c. $8.80 For cumulative preferred all dividends in arrears must be paid before dividends can be paid on common stock. In this case the board must pay the three dividends missed plus the current dividend. P7-3. LG 2: Preferred dividends Intermediate A $15.000 quarters in arrears plus the latest quarter B $ 8.80 only the latest quarter C $ 11.00 only the latest quarter D $25.500 quarters in arrears plus the latest quarter E $ 8.10 only the latest quarter P7-4. LG 2: Convertible preferred stock Challenge a. Conversion value ? conversion ratio ? stock price ? 5 ? $20 ? $100 b. Based on comparison of the preferred stock price versus the conversion value the investor should convert. If converted, the investor has $100 of value versus only $96 if she keeps ownership of the preferred stock. c. If the investor converts to common stock she will begin receiving $1.00 per share per year of dividends. Conversion will generate $5.00 per year of total dividends. If the investor keeps the preferred they will receive $10.00 per year of dividends. This additional $5.00 per year in dividends may cause the investor to keep the preferred until forced to convert through use of the call feature. Furthermore, while common stock dividends may be cut or eliminated all together with no protection, preferred dividends are typically fixed and cumulative provision. P7-5. LG 2: Person