A company has 5 million outstanding preferred shares with a market value of $45 per share. The shares pay a quarterly dividend of $1.20, and this dividend was paid yesterday. The shares were issued 5 years ago and have no maturity, but the company has an opportunity to call the shares if it pays a call premium of 3 %, plus accumulated dividends. If new preferred shares are issued at this time at a price of $45 per share, the quarterly dividend would be $1.35. The old issue would remain outstanding for 2 months after the new preferred shares were sold, and interest could be earned on the proceeds of the new issue at a rate of 5% per annum. The corporate tax rate is 35%. What is the amount the company must pay in additional dividends during the overlap period, net of any interest earned during this period?
A company has 5 million outstanding
If new preferred shares are issued at this time at a price of $45 per share, the quarterly dividend would be $1.35. The old issue would remain outstanding for 2 months after the new preferred shares were sold, and interest could be earned on the proceeds of the new issue at a rate of 5% per annum. The corporate tax rate is 35%.
What is the amount the company must pay in additional dividends during the overlap period, net of any interest earned during this period?
Preference shares are a special type of shares which pay annual dividend irrespective of the profit/loss of the company.
Dividends can be paid quarterly, or annually
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