HighTech Inc. was a small company started by four entrepreneurs a few years ago. They each initially invested $200,000 and sold $1 million in preferred shares to a wealthy private investor. The company did not earn much profit during its operations but was able to pay the promised annual dividend of $100,000 on the preferred shares.
The company did successfully develop several patents, some of which it sold and some it still holds. The four shareholders are planning to sell the remaining patents and all other assets and wind up the company to allow them to move on to other ventures. A summary of the company’s statement of financial position is as follows:
Statement of Financial Position
as at April 30, 2016
Total assets.............. $2,110,700
Total liabilities............ 85,000
Preferred shares........... 1,000,000
Common shares........... 800,000
Retained earnings......... 225,700
Total liabilities and equity........ $2,110,700
a. How much will each group of shareholders receive on the windup if HighTech is able to sell its assets for?
b. Why is it unlikely that HighTech would be able to sell its assets for $2,110,700?
c. If HighTech had never paid dividends to the common shareholders, what would be the total rate of return the common shareholders earned on their venture for each of the three prices given in part “a”?