Mega Labs develops and manufactures medicines. The company has been successful during the past few years, due primarily to having discovered, patented, and successfully marketed dozens of new medicines. The Company started to increase its dividends to the shareholders since last three years. Last year, the Company distributed $5 million dividends ($1 million to the cumulative preference shareholders and $4 million to the ordinary shareholders). Annual net profit had been rising steadily until two years ago, when it peaked at $25 million. Last year, increased competition caused net profit to decline to $18 million. Management expects profit to stabilize around this level for several years. Mega generates the following proposals: a) To issue 5 years bonds payable. However, the bond contract requires the company to limit total dividends to not more than 25% of net profit. b) To buy back its own share when there is any idle cash. REQUIRED: Evaluate EACH of the above proposals from the perspective of Preference shareholders and Ordinary shareholders (treat each option separately).

Mega Labs develops and manufactures medicines. The company has been successful during the past few years, due primarily to having discovered, patented, and successfully marketed dozens of new medicines. The Company started to increase its dividends to the shareholders since last three years. Last year, the Company distributed $5 million dividends ($1 million to the cumulative preference shareholders and $4 million to the ordinary shareholders). Annual net profit had been rising steadily until two years ago, when it peaked at $25 million. Last year, increased competition caused net profit to decline to $18 million. Management expects profit to stabilize around this level for several years. Mega generates the following proposals: a) To issue 5 years bonds payable. However, the bond contract requires the company to limit total dividends to not more than 25% of net profit. b) To buy back its own share when there is any idle cash. REQUIRED: Evaluate EACH of the above proposals from the perspective of Preference shareholders and Ordinary shareholders (treat each option separately).

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 22P

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