Webber Musicals Corporation is considering replacing its $2 million preferred share issue because market yields have declined.

Question:

Webber Musicals Corporation is considering replacing its $2 million preferred share issue because market yields have declined. The existing preferreds carry a dividend of $5 per share, which is a rate of 10 percent on the par value. Current market yields on Webber preferreds are estimated to be 7 percent. Webber preferreds are currently trading at $71.43. Flotation expenses on a new preferred issue would be $160,000.
Webber's tax rate is 28 percent. There is no call provision. Should Webber Musicals consider replacing its existing preferred shares? Show your calculations.

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...

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