Question

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 eleven 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 1,550,000 total shares currently outstanding, the original founder’s family owns 52,025 shares.

What is the percentage of the founder’s family votes to Class B votes? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

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Question

Enterprise Storage Company has 600,000 shares of cumulative preferred stock outstanding, which has a stated

dividend of $6.65. It is six years in arrears in its dividend payments. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. How much in total dollars is the company behind in its payments? 

b. The firm proposes to offer new common stock to the preferred stockholders to wipe out the deficit.

The common stock will pay the following dividends over the next four years:

    D₁$1.95   D₂2.05   D₃2.15   D₄2.25 

The company anticipates earnings per share after four years will be $4.25 with a P/E ratio of 14.

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 11 percent.

Compute the 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? 

 

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