The 2008 annual report of Northrop Grumman Corporation includes the following disclosure in its shareholders' equity footnote:

Required

a. Explain what is meant by "mandatorily redeemable" and "convertible" preferred stock.

b. The company's balance sheet reports preferred stock of \(\$ 350\) million at December 31, 2007 (and \(\$ 0\) at December 31,2008\()\). As is typical, Northrop Grumman originally sold these preferred at par. Confirm that the par value of the preferred stock is \(\$ 100\) per share.

c. Northrop's footnotes report that the fair value of the preferred shares was \(\$ 146\) per share at December 31, 2008. What would explain this large increase in its preferred stock's market price?

d. Use the financial statement effects template to record the conversion of the preferred stock on April 4, 2008. Assume that all 3.5 million shares were converted. The par value of the company's common stock is \(\$ 1\) per share.

Transcribed Image Text:

Conversion of Preferred Stock On February 20, 2008, the company's board of directors approved the redemption of all of the 3.5 million shares of mandatorily redeemable convertible preferred stock on April 4, 2008. Prior to the redemption date, substantially all of the preferred shares were converted into common stock at the election of shareholders. All emaining unconverted preferred shares were redeemed by the company on the redemption date. As a result of the conversion and redemption, the company issued approximately 6.4 million shares of common stock.