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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

Explain how the zero-coupon rate bond provides return to the investor. What are the advantages to the corporation? (LO16-2)

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.

c. What are the earnings per share (EPS) and the price-earnings ratio before the issue (based on a stock price of $48)? What will be the price per share immediately after the sale of stock if the P/E stays constant?

Take the following list of securities and arrange them in order of their priority of claims: (LO16-1)

Preferred stock Senior debenture

Subordinated debenture Senior secured debt

Common stock Junior secured debt

The Presley Corporation is about to go public. It currently has after-tax earnings of \(7,200,000, and 2,100,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 800,000 new shares. The new shares will be priced to the public at \)25 per share, with a 5 percent spread on the offering price. There will also be $260,000 in out-of-pocket costs to the corporation.

d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public.

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.

e. Are the shareholders better off because of the sale of stock and the resultant investment? What other financing strategy could the company have tried to increase earnings per share?
See all solutions

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