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17-10. Solution:
Northern Airlines
Mr. Michaels controls 280,000 votes (40,000 shares × 7
directors).
11. Different classes of voting stock (LO17-1) Rust Pipe Co. was established in 1994. Four
years later, the company went public. At that time, Robert Rust, the original owner, decided
to establish two classes of stock. The first represents Class A founders’ stock and is entitled
to nine votes per share. The normally traded common stock, designated as Class B, is
entitled to one vote per share. In late 2010, Mr. Stone, an investor, was considering
purchasing shares in Rust Pipe Co. While he knew founders’ shares were not often present
in other companies, he decided to buy the shares anyway because of a new technology Rust
Pipe had developed to improve the flow of liquids through pipes.
Of the 1,450,000 total shares currently outstanding, the original founder’s family owns
51,825 shares. What is the percentage of the founder’s family votes to Class B votes?
17-11. Solution:
Rust Pipe Company
Founder’s family votes = Shares owned × 9
Class B votes = Total shares – founder’s family shares
c. Carol doesn’t know if she wants to exercise her rights or sell them. Would either
alternative have a more positive effect on her wealth?
17-13. Solution:
Computer Graphics
a.
1
o
M S
RN
-
=+
$66 $54 $12 $2.40 value per right
4 1 5
-
= = =
+
b. Carol owns 1,400 shares, so she would receive 1,400 rights.
c. Neither exercising the rights nor selling them would have any
14. Investing in rights (LO17-3) Todd Winningham IV has $4,800 to invest. He has been
looking at Gallagher Tennis Clubs Inc. common stock. Gallagher has issued a rights
offering to its common stockholders. Six rights plus $48 cash will buy one new share.
Gallagher’s stock is selling for $66 ex-rights.
a. How many rights could Todd buy with his $4,800? Alternatively, how many shares
of stock could he buy with the same $4,800 at $66 per share?
b. If Todd invests his $4,800 in Gallagher rights and the price of Gallagher stock rises to
$70 per share ex-rights, what would his dollar profit on the rights be? (First compute
profit per right.)
c. If Todd invests his $4,800 in Gallagher stock and the price of the stock rises to $70
per share ex-rights, what would his total dollar profit be?
d. What would be the answer to part b if the price of Gallagher’s stock falls to $40 per
share ex-rights instead of rising to $70?
e. What would be the answer to part c if the price of Gallagher’s stock falls to $40 per
share ex-rights?
17-14. Solution:
Gallagher Tennis Clubs Inc.
(Todd Winningham IV)
a.
e
M S
RN
-
=
$66 $48 $3 per right
6
-
= =
b. ($70 – $48)/6 = $3.67 per right value
c. ($70 – $66) = $4 profit per share
d. ($40 – $48)/6 = –$1; the right’s value = 0
e. ($40 – $66) = $26 loss per share
15. Effect of rights on stockholder position (LO17-3) Mr. and Mrs. Anderson own two
shares of Magic Tricks Corporation’s common stock. The market value of the stock is $58.
The Andersons also have $46 in cash. They have just received word of a rights offering.
One new share of stock can be purchased at $46 for each two shares currently owned
(based on two rights).
a. What is the value of a right?
b. What is the value of the Andersons’ portfolio before the rights offering? (Portfolio in
this question represents stock plus cash.)
c. If the Andersons participate in the rights offering, what will be the value of their
portfolio, based on the diluted value (ex-rights) of the stock?
d. If they sell their two rights but keep their stock at its diluted value and hold onto their
cash, what will be the value of their portfolio?
17-15. Solution:
Magic Tricks Corp.
(The Andersons)
a.
1
o
M S
RN
-
=+
$58 $46 $12 $4
2 1 $3
-
= = =
+
b. Portfolio value
c. First compute diluted value:
Diluted value = Market value ex-rights
or
Average value of 1 share (Market value ex-rights) = $54
Portfolio value
d. Portfolio value
16. Relation of rights to EPS and the price-earnings ratio (LO17-3) Walker Machine Tools
has 5.5 million shares of common stock outstanding. The current market price of Walker
common stock is $52 per share rights-on. The company’s net income this year is $17.5
million. A rights offering has been announced in which 550,000 new shares will be sold at
$46.50 per share. The subscription price plus five rights is needed to buy one of the new
shares.
a. What are the earnings per share and price-earnings ratio before the new shares are
sold via the rights offering?
b. What would the earnings per share be immediately after the rights offering? What
would the price-earnings ratio be immediately after the rights offering? (Assume there
is no change in the market value of the stock, except for the change when the stock
begins trading ex-rights.) Round all answers to two places after the decimal point.
17-16. Solution:
Walter Machine Tools
a. $17.5 million earnings/5.5 million shares = $3.18 earnings
b. 5.5 million original shares + 550,000 new shares =
c. Preferred stock 70 percent of the dividend is excluded
18. Preferred stock dividends in arrears (LO17-5) National Health Corporation (NHC) has a
cumulative preferred stock issue outstanding, which has a stated annual dividend of $8 per
share. The company has been losing money and has not paid preferred dividends for the
last five years. There are 350,000 shares of preferred stock outstanding and 650,000 shares
of common stock.
a. How much is the company behind in preferred dividends?
b. If NHC earns $13,500,000 in the coming year after taxes but before dividends, and
this is all paid out to the preferred stockholders, how much will the company be in
arrears (behind in payments)? Keep in mind that the coming year would represent the
sixth year.
c. How much, if any, would be available in common stock dividends in the coming year
if $13,500,000 is earned as explained in part b?
17-18. Solution:
National Health Corp.
b. $14,000,000 original dividends in arrears + ($8 ×
c. No common stock dividends can be paid until all the
19. Preferred stock dividends in arrears (LO17-5) 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?
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 15-year maturity. Using the bond
valuation table in Chapter 16 (Table 16-2), indicate the market value of a $1,000 par
value bond.
c. Based on market value, how many bonds must be issued to provide the compensation
determined in part a? (Round to the nearest whole number.)
17-19. Solution:
Robbins Petroleum Company
a. $6.50 per share × 690,000 shares × 4 years =
b. $1345.52
$14,352,000
D1..................$1.15
D2..................1.25
D3..................1.35
D4..................1.45
The company anticipates earnings per share after four years will be $4.09 with a P/E ratio
of 10.
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 14 percent. Round to two places to the right of the decimal point. What is the
calculated 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? Round to the nearest whole
number.
