Problem 1: Mr. Frost controls proxies for 32,000 of the 60,000 outstanding shares of Express Frozen Foods, Inc. Mr. Cooke heads a dissident group that controls the remaining 28,000 shares. There are seven board members to be elected and cumulative voting rules apply. Frost does not understand cumulative voting and plans to cast 80,000 of his 224,000 (32,000 X 7) votes for his brother-in-law, Jack. His remaining votes will be spread evenly for three other candidates. How many directors can Mr. Cooke elect if Mr. Frost acts as describe? Use logical numerical analysis rather than a set formula to answer the question. Cooke has 196,000 votes (28,000 X 7)
Problem 2: Silicon Industries 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 four years. There are 260,000 shares of preferred stock outstanding and 500,000 shares of common stock.
a. How much is the company behind in preferred dividends?
b. If Silicon Industries earns $7.5 million in the coming year after taxes and before dividends, and this is all paid out to the preferred stockholders, how much will the company be arrears (behind in payments)keep in mind that the coming year would represent the fifth year.
c. How much, if any would be available in common stock dividends in the coming year if $7.5 million were earned as explained in part b?
Problem 3: The treasurer of Garcia Mexican Restaurants (a corporation) currently has $100,000 invested in preferred stock yielding 7.5 percent. He appreciates the tax advantage of preferred stock and is considering buying $100,000 more with borrowed funds. The cost of the borrowed funds is 9.5 percent. He suggests this proposal to his board of directors. The directors are somewhat concerned by the fact that the treasurer is paying 2 percent more for funds than will be earned. The firm is in a 34 percent tax bracket, with dividends taxed at 15 percent.
a. Compute the amount of the after-tax income from the additional preferred stock if it is purchased.
b. Compute the after-tax borrowing cost to purchase the additional preferred stock. Multiply the interest cost times (1-T).
c. Should the treasurer proceed with his proposal?
d. If interest rates and dividends yield in the market go up six months after a decision to purchase is made, what impact will this have on the outcome?