Problem 17-12 Problem 17-19
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Foundations of Financial Management
MAIN MENU – CHAPTER 17
Common and Preferred Stock Financing
Problem 17-12
Objective: Different classes of voting stock
Student Name:
Course Name:
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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 10 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 the
existence of 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 1,200,000 total shares currently outstanding, the original founder’s family owns 51,325 shares. What is the
percentage of the founder’s family votes to Class B votes?
Foundations of Financial Management
Block, Hirt and Danielsen – Fourteenth Edition
Problem 17-12
Instructions
Enter formulas to calculate the requirements of this problem.
Information
Founder’s family shares 51,325
Votes per share 10
Shares outstanding 1,200,000
Founder’s family votes 513,250
Class B votes 1,148,675
Percentage of founder’s votes to Class B votes 44.68%
Solution
Problem 17-19
Objective: Preferred stock dividends in arrears
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Robbins Petroleum Company is four years in arrears on cumulative preferred stock dividends. There are 850,000
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 90
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 14 percent for similar bonds. The bonds will have a 15-year
maturity. Using the bond valuation table in Chapter 16 (Table 16–3 on page 500), 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.)
Foundations of Financial Management
Block, Hirt and Danielsen – Fourteenth Edition
Problem 17-19
Instructions
Enter formulas and functions to calculate the requirements of this problem.
Information
Dividend per share $6.50
Shares outstanding 850,000
Years in arrears 4
Compensation percentage 90%
a. How much should the compensation be? $19,899,180
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 14 percent for similar bonds. The bonds will have a 15-year
maturity. Using the bond valuation table in Chapter 16 (Table 16–3 on page 500), indicate the market value of a
$1,000 par value bond.
Bond value $877.16
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.) 22,686
Solution