National Health Corporation (NHC) has a cumulative preferred stock issue outstan
ID: 2755747 • Letter: N
Question
National Health Corporation (NHC) has a cumulative preferred stock issue outstanding, which has a stated annual dividend of $8 per share. The company has been losing money and has not paid preferred dividends for the last five years. There are 350,000 shares of preferred stock outstanding and 650,000 shares of common stock.
a. How much is the company behind in preferred dividends?
b. If NHC earns $13,500,000 in the coming year after taxes but before dividends, and this is all paid out to the preferred stockholders, how much will the company be in arrears (behind in payments)? Keep in mind that the coming year would represent the sixth year.
c. How much, if any, would be available in common stock dividends in the coming year if $13,500,000 is earned as explained in part b?
PLEASE PROVIDE ANSWERS TO A, B, AND C. THANKS.
Explanation / Answer
Answer (a)
As the company has not paid preferred stock dividend for the last 5 years
Amount of dividend per share the company is behind = $ 8 * 5 = $ 40
Total preferred stock dividend the company is behind = $ 40 * 350,000 = $14,000,000
Answer (b)
preferred dividend payable by company in 6th year = $ 8 * 350,000 = $ 2,800,000
Total accumulated preferred dividend amount for 6 years = $ 14,000,000 + $ 2,800,000
= $ 16,800,000
Net profit after taxes of NHC = $ 13,500,000
If the entire amount is paid as dividend to preferred stock holders,
Total amount of dividend the company will be behind in payments =$ 16,800,000-$13,500,000
= $ 3,300,000
Answer (c)
As the company has not cleared the arrears of preferred dividend payments, nothing is available for paying common stock dividends
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