Milton Simon owns 200 shares of preferred stock of the Global Travel Corp. The shares were intended to pay $4.75 annually, but have not paid a dividend in five years. Because the dividends are cumulative, the company cannot pay dividends to common stockholders until it eliminates its obligation to preferred stockholders.
a. Can the preferred stockholders force Global Travel Corp. to pay dividends for the last five years with a threat of forcing the firm into bankruptcy?
b. Assume Global Travel Corp. does not have the cash to pay the five years of past preferred stock dividends, but will offer new common stock shares to make up for the deficiency. The firm will offer a common stock payout that equals the five-year deficiency, plus provide an additional 20 percent premium in common stock shares to keep the preferred stockholders satisfied. What is the value of the common stock payout for each preferred stock share? Note that the preferred stockholders will still retain ownership of their original shares; only the deficiency in past dividends will be eliminated.
c. Assume Milton Simon receives the proceeds from his 200 shares and reinvests them in either a U.S. government security paying 5.6 percent or a municipal bond paying 4.5 percent. Milton is in a 35 percent tax bracket. How much will he have in cash on an after-tax return basis from each investment? (Disregard a tax on the common stock payout, only consider a potential tax on the returns from his investment.)