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# Preferred Dividends in Arrears

Enterprise Storage Company has 400,000 shares of cumulative preferred stock outstanding, which has as stated dividend of \$4.75. It is six years in arrears in its dividend payments.

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..... \$ 1.25
D2..... 1.50
D3..... 1.75
D4..... 2.00

The company anticipates earnings per share after four years will be \$4.05 with a P/E ratio of 12.

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 10 percent. Round to two places to the right of the decimal point. What is the calculated 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? Round to the nearest whole number.

#### Solution Preview

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

The total number of preferred stock is 400,000 shares and the dividend per share is 4.75. The total dividend amount per year is ...

#### Solution Summary

The solution explains how to calculate the dividends in arrears for preferred stock

\$2.19