Robbins Petroleum Company is four years in arrears on cumulative preferred stock dividends. There are 780,000 preferred shares outstanding, and the annual dividend is $4.50 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 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?