Lou Matson, President of Midsouth Exploration Company, knew that circumstances had finally become favorable for drilling for oil in March of 2014 For the last three years conditions had been miserable for oil companies As the price of oil slipped to $10 a barrel, it was no longer economically feasible to search for new sources of petroleum However, the booming world economy in the first quarter of 2016, along with restricted output by OPEC and other oil producing nations, had sent the price of oil to over $30 a barrel Midsouth Exploration had extensive holdings in Louisiana and East Texas that had largely gone unattended over the last three years When Lou Matson called his chief geologist, Harold Boudreaux, the drilling expert quickly informed Matson that all systems were go from an exploration viewpoint Raising Capital However, Midsouth had a problem and that was raising capital to carry out the new exploration While the firm often formed limited partnerships for specific projects, permanent capital was also required to support the increased operations of the firm A recent conversation with Arthur Barnes III, the managing director of the investment banking firm of Barnes, Colson, and Wilson, Inc , lead Mr Matson to believe that immediate and decisive financing activity was necessary Thirty million dollars in new capital needed to be raised as a base for future operations Because of the risky nature of the firm's business, debt financing was out of the question The investment banker suggested a new common stock issue might be the best alternative, but he also pointed out there was a potential problem In 2007, the company had issued $8 50 (dividend) cumulative preferred stock at $100 par value There were 200,000 shares issued The company promptly made payments on the preferred stock from 2008 to 2012 However, in the second half of 2013 and in 2014 and 2015 no preferred stock dividends were paid Mr Barnes, the investment banker, pointed out that common stock would be difficult to sell with the preferred stock dividend in arrears (unpaid) With cumulative preferred stock, no dividends can be paid to common stockholders unless all prior dividend claims by preferred stockholders have been satisfied Of course, current claims must also be met Financing Plan Mr Barnes' investment banking experience 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 20 in flotation costs to the corporation), a $ 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 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 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 2 percent dividend yield on preferred and only a 2 percent dividend yield on common stock ($ 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 75 percent rate ( g ) in the future Required Has the company broken any laws or agreements by failing to make dividend payments on the preferred stock 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 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 2 percent yield 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 20 Allison Boone, M D Allison Boone had been practicing medicine for seven years Her specialty was neurology She had received her bachelor's degree in chemistry from Kent State University and her M D from Washington University in St Louis She did her residency at Columbia Presbyterian Hospital in New York Allison practiced neurology in a clinic with three other doctors in Hurst, Texas Her husband, Samuel L Boone, held an administrative position for Harris Methodist HMO in Arlington, Texas Allison and Samuel had been married for five years and were parents of young twin sons, Todd and Trey They lived in Arlington in a beautiful four room house overlooking Lake Arlington Allison normally left for work at 7 30 a m and closed her office at 5 30 p m to return home On Tuesday, March 6 th , 2016 at 5 15 p m , she received an emergency call from Arlington General Hospital and immediately went to the hospital to help a patient who had suffered serious brain damage By the time she had administered aid and helped prepare the patient for surgery it was 11 00 p m On her way home as she passed the Ballpark in Arlington (home of the Texas Rangers baseball team), she was confronted head on by a drunken driver going over 80 miles an hour A crash was inevitable and Allison and the other driver were killed instantly The drunken driver was making a late delivery for Wayland Frozen Foods, Inc Legal Considerations The families of both drivers were devastated by the news of the accident After the funeral and explaining the situation to the children, Samuel Boone knew he must seek legal redress for his family's enormous loss Following interviews with a number of lawyers, he decided to hire Sloan Whitaker Sloan was with a Dallas law firm (Hanson, Sloan, and Thomason) that specialized in plaintiff's lawsuits He had been in practice for over 20 years since graduating from Southern Methodist University (SMU) law school in 1996 When Sloan began his investigation on behalf of Samuel Boone and his family, he was surprised to find out the driver of the delivery vehicle had a prior record of alcohol abuse and that Wayland Frozen Foods, Inc had knowledge of the problem when they hired him It appears the driver was a relative of the owner and at the time of employment he revealed what he termed a past alcoholic problem that was now under control In any event, he was acting as an employee for Wayland Frozen Foods in using their truck to make a business related delivery at the time of the accident The fact that he was speeding and intoxicated at the time of the impact only increased the legal exposure for Wayland Frozen Foods After much negotiating with the law firm that represented Wayland Frozen Foods (and its insurance company), Sloan Whitaker received three proposals for an out of court settlement to be paid to Allison Boone's family The intent of the proposals was to replace the future earning's power of Allison Boone, less any of the earnings she would have personally needed for her normal living requirements Also, the value that she provided for her family as a wife and mother, quite aside from her earning power, had to be considered Finally, there was the issue of punitive damages that Wayland Frozen Foods was exposed to as a result of letting an unqualified driver operate its truck If the case went to court, there was no telling how much a jury might assign to this last factor The three proposals are listed below An actuarial table indicated that Allison, age 37 at the time of the accident, had an anticipated life expectancy of 40 more years Proposal 1 Pay the family of Allison Boone $300,000 a year for the next 20 years, and $500,000 a year for the remaining 20 years Proposal 2 Pay the family a lump sum payment of $5 million today Proposal 3 Pay the family of Allison Boone a relatively small amount of $50,000 a year for the next 40 years, but also guarantee them a final payment of $75 million at the end of 40 years In order to analyze the present value of these three proposals, attorney Sloan Whitaker called on a financial expert to do the analysis You will aid in the process Required Assume a discount rate (interest rate) of 6 percent is used, which of the three projects has the highest present value In analyzing the first proposal, take the present value of the 20 year $300,000 annuity Then take the present value of the deferred annuity of $500,000 that will run from the 21 st through the 40 th year The answer you get for the second annuity will represent the value at the beginning of the 21 st year (the same as the end of the 20 th year) You will need to discount this lump sum value back for 20 years as a single amount to get its present value You then add together the present value of the first and second annuity The second and third proposals are straight forward and require no further explanation

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Lou Matson, President of Midsouth Exploration Company, knew that circumstances had finally become favorable for drilling for oil in March of 2014. For the last

Lou Matson, President of Midsouth Exploration Company, knew that circumstances had finally become favorable for drilling for oil in March of 2014. For the last three years conditions had been miserable for oil companies. As the price of oil slipped to $10 a barrel, it was no longer economically feasible to search for new sources of petroleum. However, the booming world economy in the first quarter of 2016, along with restricted output by OPEC and other oil-producing nations, had sent the price of oil to over $30 a barrel.

Midsouth Exploration had extensive holdings in Louisiana and East Texas that had largely gone unattended over the last three years. When Lou Matson called his chief geologist, Harold Boudreaux, the drilling expert quickly informed Matson that all systems were go from an exploration viewpoint.

Raising Capital

However, Midsouth had a problem and that was raising capital to carry out the new exploration. While the firm often formed limited partnerships for specific projects, permanent capital was also required to support the increased operations of the firm. A recent conversation with Arthur Barnes III, the managing director of the investment-banking firm of Barnes, Colson, and Wilson, Inc., lead Mr. Matson to believe that immediate and decisive financing activity was necessary.

Thirty million dollars in new capital needed to be raised as a base for future operations. Because of the risky nature of the firm's business, debt financing was out of the question. The investment banker suggested a new common stock issue might be the best alternative, but he also pointed out there was a potential problem.

In 2007, the company had issued $8.50 (dividend) cumulative preferred stock at $100 par value. There were 200,000 shares issued. The company promptly made payments on the preferred stock from 2008 to 2012. However, in the second half of 2013 and in 2014 and 2015 no preferred stock dividends were paid. Mr. Barnes, the investment banker, pointed out that common stock would be difficult to sell with the preferred stock dividend in arrears (unpaid). With cumulative preferred stock,

no dividends can be paid to common stockholders unless all prior dividend claims by preferred stockholders have been satisfied. Of course, current claims must also be met.

Financing Plan

Mr. Barnes' investment banking experience 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 $1.20 in flotation costs to the corporation), a $.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 9.2 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 9.2 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 9.2 percent dividend yield on preferred and only a 2 percent dividend yield on common stock ($.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 9.75 percent rate (g) in the future.

Required

Has the company broken any laws or agreements by failing to make dividend payments on the preferred stock?
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?
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 9.2 percent yield?
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 $1.20.

Allison Boone, M.D.

Allison Boone had been practicing medicine for seven years. Her specialty was neurology. She had received her bachelor's degree in chemistry from Kent State University and her M.D. from Washington University in St. Louis. She did her residency at Columbia Presbyterian Hospital in New York. Allison practiced neurology in a clinic with three other doctors in Hurst, Texas.

Her husband, Samuel L. Boone, held an administrative position for Harris Methodist HMO in Arlington, Texas. Allison and Samuel had been married for five years and were parents of young twin sons, Todd and Trey. They lived in Arlington in a beautiful four-room house overlooking Lake Arlington.

Allison normally left for work at 7:30 a.m. and closed her office at 5:30 p.m. to return home. On Tuesday, March 6^th, 2016 at 5:15 p.m., she received an emergency call from Arlington General Hospital and immediately went to the hospital to help a patient who had suffered serious brain damage. By the time she had administered aid and helped prepare the patient for surgery it was 11:00 p.m.

On her way home as she passed the Ballpark in Arlington (home of the Texas Rangers baseball team), she was confronted head on by a drunken driver going over 80 miles an hour. A crash was inevitable and Allison and the other driver were killed instantly. The drunken driver was making a late delivery for Wayland Frozen Foods, Inc.

Legal Considerations

The families of both drivers were devastated by the news of the accident. After the funeral and explaining the situation to the children, Samuel Boone knew he must seek legal redress for his family's enormous loss. Following interviews with a number of lawyers, he decided to hire Sloan Whitaker.

Sloan was with a Dallas law firm (Hanson, Sloan, and Thomason) that specialized in plaintiff's lawsuits. He had been in practice for over 20 years since graduating from Southern Methodist University (SMU) law school in 1996.

When Sloan began his investigation on behalf of Samuel Boone and his family, he was surprised to find out the driver of the delivery vehicle had a prior record of

alcohol abuse and that Wayland Frozen Foods, Inc. had knowledge of the problem when they hired him. It appears the driver was a relative of the owner and at the time of employment he revealed what he termed "a past alcoholic problem that was now under control." In any event, he was acting as an employee for Wayland Frozen Foods in using their truck to make a business related delivery at the time of the accident. The fact that he was speeding and intoxicated at the time of the impact only increased the legal exposure for Wayland Frozen Foods.

After much negotiating with the law firm that represented Wayland Frozen Foods (and its insurance company), Sloan Whitaker received three proposals for an out-of-court settlement to be paid to Allison Boone's family. The intent of the proposals was to replace the future earning's power of Allison Boone, less any of the earnings she would have personally needed for her normal living requirements. Also, the value that she provided for her family as a wife and mother, quite aside from her earning power, had to be considered. Finally, there was the issue of punitive damages that Wayland Frozen Foods was exposed to as a result of letting an unqualified driver operate its truck. If the case went to court, there was no telling how much a jury might assign to this last factor.

The three proposals are listed below. An actuarial table indicated that Allison, age 37 at the time of the accident, had an anticipated life expectancy of 40 more years.

Proposal 1	Pay the family of Allison Boone $300,000 a year for the next 20 years, and $500,000 a year for the remaining 20 years.
Proposal 2	Pay the family a lump sum payment of $5 million today.
Proposal 3	Pay the family of Allison Boone a relatively small amount of $50,000 a year for the next 40 years, but also guarantee them a final payment of $75 million at the end of 40 years.

In order to analyze the present value of these three proposals, attorney Sloan Whitaker called on a financial expert to do the analysis. You will aid in the process.

Required

Assume a discount rate (interest rate) of 6 percent is used, which of the three projects has the highest present value?

In analyzing the first proposal, take the present value of the 20 year $300,000 annuity. Then take the present value of the deferred annuity of $500,000 that will run from the 21^st through the 40^th year. The answer you get for the second annuity will represent the value at the beginning of the 21^st year (the same as the end of the 20^th year). You will need to discount this lump sum value back for 20 years as a single amount to get its present value. You then add together the present value of the first and second annuity.

The second and third proposals are straight forward and require no further explanation.