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A firm with a 40% tax rate has $10 million of preferred shares outstanding (each share has a $100par value) that pay a dividend of 10 percent and are callable at a premium of 6 percent. Issuing and underwriting expenses of $700,000 would have to be incurred.
(a) Assume that current dividend rates have dropped to 8 percent. What would be the market price of a preferred share (if it were non-redeemable/non-callable/non-retractable)?
(b) To what level would the dividend rate (on comparable issues) have to drop in order to make refinancing attractive?
(c) Assume that dividend yields have dropped to 8 percent. How many years will it take for the company to recoup the initial refinancing costs?
(d) Assume that the company chooses to call the 10% issue and refinance (with new shares)at 8%. What is the maximum number of new preferred shares (each new share has a $100par value) the firm can issue without increasing total annual dividend payments from their current level (at 10%)?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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