Question

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

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.

$\begin{array}{c}\mathbf{Dividend}\mathbf{}\mathbf{in}\mathbf{}\mathbf{arrears}\mathbf{=}\mathbf{Annual}\mathbf{}\mathbf{dividend}\mathbf{}\mathbf{per}\mathbf{}\mathbf{share}\\ \mathbf{\times }\mathbf{Shares}\mathbf{}\mathbf{outstanding}\\ \mathbf{\times }\mathbf{Time}\mathbf{}\mathbf{for}\mathbf{}\mathbf{which}\mathbf{}\mathbf{arrears}\mathbf{}\mathbf{are}\mathbf{}\mathbf{due}\\ \mathbf{=}\mathbf{\$}\mathbf{6}\mathbf{.}\mathbf{50}\mathbf{\times }\mathbf{690}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{4}\\ \mathbf{=}\mathbf{\$}\mathbf{17}\mathbf{,}\mathbf{940}\mathbf{,}\mathbf{000}\end{array}$

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