Financing Plan

Mr$.$ Barnes$$ investment banking experi$$ence led him to believe that any new common stock that Midsouth Exploration Company issued must pay dividends.

He suggested that if Midsouth sold common stock at $$25$ per share to the public $($less $$1\mathrm{.}20$ in flotation costs to the corporation$),$ a $$\mathrm{.}50$ per share common stock dividend would likely be necessary to attract investors.

Mr$.$ Barnes further suggested that instead of attempting to pay all of the preferred stock dividends in arrears, the company offer the old preferred stockholders new preferred stock that is worth $50$ percent more than the outstanding preferred stock $($which is currently selling for the amount it is totally in arrears$).$ The new preferred stock would pay a $9\mathrm{.}2$ percent dividend yield.

Because the old preferred stockholders would become new preferred stockholders, they would once again become dividend recipients, and would have a tax obligation related to the annual dividend yield of $9\mathrm{.}2$ percent.

Cost of Funding

As president of Midsouth Exploration Company, Mr$.$ Matson liked the idea of exchanging new preferred stock for old preferred stock as well as selling new common stock. He was definitely willing to go along with the plan. However, there was one question that bothered him. Being a petroleum engineer, he had no formal business training and that, perhaps, was the reason behind his concern. He wondered why the firm had to pay a $9\mathrm{.}2$ percent dividend yield on preferred and only a $2$ percent dividend yield on common stock $($$$\mathrm{.}50$ dividend$/$$$25$ stock price$).$ His investment banker explained that the cost of common stock was not simply the cost of the dividend, but the total expected return to stockholders that must be earned to keep them satisfied. He suggested that investors in Midsouth Exploration Company had an expectation that the company would be able to grow at a $9\mathrm{.}75$ percent rate $($g$)$ in the future.

Required $1.$ Has the company broken any laws or agreements by failing to make dividend payments on the preferred stock?

$2.$ How far is the company in arrears $($behind$)$ in its preferred stock dividends on a per share basis? How much is it totally in arrears on all shares?

$3.$ What would be the price per share of the new preferred stock?

How much would the new preferred stock$$s dividend per share be with a $9\mathrm{.}2$ percent yield?

$4.$ Under the proposed financing plan to raise $$30$ million in new funds, how many new shares of common stock must be issued?

The out$-$of$-$pocket costs will be $$250,000,$ while the underwriting spread $($flotation cost$)$ is $$1\mathrm{.}20.$