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.

b. Robbins will compensate the preferred stockholders in the form of bonds paying 12 percent interest in a market environment in which the going rate of interest is 8 percent for similar bonds. The bonds will have a 10-year maturity. Using the bond valuation table in Chapter 16 (Table 16-2), indicate the market value of a \)1,000 par value bond.

Short answer

The market value of the bond will be $1,268.4.

Step-by-step solution

Information provided in the question

Interest rate = 12%

Period = 10 years

Market value of bond = $1000 par value

Interest = $120

Market value of the bond

The market value of the bond will be $1,268.4.

$\begin{array}{c}\mathbf{Market}\mathbf{}\mathbf{value}\mathbf{=}\mathbf{Dividend}\mathbf{\times }{\mathbf{PVAF}}_{(8\%,10years)}\mathbf{+}\mathbf{Par}\mathbf{}\mathbf{value}\mathbf{\times }{\mathbf{PVF}}_{(8\%,10years)}\\ \mathbf{=}\mathbf{\$}\mathbf{120}\mathbf{\times }\mathbf{6}\mathbf{.}\mathbf{71}\mathbf{+}\mathbf{\$}\mathbf{1000}\mathbf{\times }\mathbf{0}\mathbf{.}\mathbf{4632}\\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{268}\mathbf{.}\mathbf{4}\end{array}$