share (EPS)? Interpreting Disclosure on Convertible Preferred Securities The 200
ID: 2508949 • Letter: S
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share (EPS)? Interpreting Disclosure on Convertible Preferred Securities The 2008 annual report of Northrop Grumman Corporation includes the t shareholders' equity footnote. P8-57. ollowing disclosure in its 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, substantialy all of the preferred shares were converted into common stock at the election of shareholders. All remaining uncon- verted 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 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 S0 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 S100 per share. Northrop's footnotes report that the fair value of the preferred shares was $146 per share at Decem- ber 31, 2008. What would explain this large increase in its preferred stock's market price? c. d. Use the financial statement e to record the conversion of the preferred stock on Apm 4,2008. Assume that all 3.5 million shares were converted. The par value of the company's comm stock is $1 per share.Explanation / Answer
a.) Mandatorily redeemable preferred stock means preferred stock which must be redeemed for cash(or other asset) at a certain time(or event). Basically these stocks come with a built in call option by the issuer.
Convertible preferred stock gives the option to the investor to convert these into common stock after a certain time period.
b.) Yes the par value is $100
c.) Assuming the company had issued other preferred stock in the past whose fair value has increased
It can be because the preferred stock which got redeemed in 2008 were too expensive and now the burden has been released.
d.) Convertible preferred stock 3.5Million par value @100 Dr. 350,000,000
To, Equity stock 350Million par value @1 350,000,000
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