# Stock Valuation

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Chapter 7
Stock Valuation

Solution to Problems
P7-1. LG 2: Authorized and Available Shares Basic Maximum shares available for sale Authorized shares 2,000,000 Less: Shares outstanding 1,400,000 Available shares 600,000 \$48,000,000 = 800,000 shares (b) Total shares needed = \$60 The firm requires an additional 200,000 authorized shares to raise the necessary funds at \$60 per share. (c) Aspin must amend its corporate charter to authorize the issuance of additional shares. (a)

P7-2.

LG 2: Preferred Dividends Intermediate (a) \$8.80 per year or \$2.20 per quarter (b) \$2.20 For a noncumulative preferred only the latest dividend has to be paid before dividends can be paid on common stock. (c) \$8.80 For cumulative preferred all dividends in arrears must be paid before dividends can be paid on common stock. In this case the board must pay the 3 dividends missed plus the current dividend.

P7-3.

LG 2: Preferred Dividends Intermediate A B C D E \$15.002 \$8.80 \$11.00 \$25.504 \$8.10 quarters in arrears plus the latest quarter only the latest quarter only the latest quarter quarters in arrears plus the latest quarter only the latest quarter

Chapter 7

Stock Valuation

171

P7-4.

LG 2: Convertible Preferred Stock Challenge (a) Conversion value = conversion ratio × stock price = 5 × \$20 = \$100 (b) Based on comparison of the preferred stock price versus the conversion value the investor should convert. If converted, the investor has \$100 of value versus only \$96 if she keeps ownership of the preferred stock. (c) If the investor converts to common stock she will begin receiving \$1.00 per share per year of dividends. Conversion will generate \$5.00 per year of total dividends. If the investor keeps the preferred they will receive \$10.00 per year of dividends. This additional \$5.00 per year in dividends may cause the investor to keep the preferred until forced to...

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