Kuhns Corp. has 190,000 shares of preferred stock outstanding that is cumulative and 100,000 common stock outstanding. The preferred dividend is $6.60 per share and has not been paid for 3 years. If Kuhns earned $1.40 million this year, what could be the maximum payment to the preferred stockholders on a per share basis?
To determine the maximum payment to the preferred stockholders on a per share basis, we need to consider the cumulative nature of the preferred stock and the earnings of the company.
Cumulative preferred stock means that any unpaid dividends accumulate over time and must be paid in the future before any dividends can be paid to common stockholders.
In this case, Kuhns Corp. has 190,000 shares of cumulative preferred stock outstanding and the preferred dividend is $6.60 per share. The dividends on preferred stock have not been paid for three years.
To calculate the maximum payment to the preferred stockholders on a per share basis, we need to determine the total amount of unpaid dividends.
Unpaid dividends = Preferred dividend per share x Number of years
Unpaid dividends = $6.60 x 3 = $19.80
The maximum payment to the preferred stockholders on a per share basis would be the remaining earnings available after paying the unpaid dividends to the preferred stockholders:
Remaining earnings = Earnings - Unpaid dividends
Remaining earnings = $1.40 million - ($19.80 x 190,000)
Remaining earnings = $1.40 million - $3,762,000
The remaining earnings are negative, which means that there are not enough earnings to pay the unpaid dividends to the preferred stockholders. Therefore, there would be no payment to the preferred stockholders on a per share basis in this scenario.