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 stock holders, how many 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?
a. To calculate how much the company is behind in preferred dividends, we need to multiply the annual dividend per preferred share by the number of preferred shares outstanding.
Preferred Dividends in arrears = Annual Dividend per Preferred Share * Number of Preferred Shares Outstanding
Preferred Dividends in arrears = $8 * 350,000
Preferred Dividends in arrears = $2,800,000
Therefore, the company is behind $2,800,000 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, we can calculate how much the company will be in arrears after the payment.
Preferred Dividends to be paid = $13,500,000
Preferred Dividends in arrears = $2,800,000
Total Preferred Dividends in arrears after payment = Preferred Dividends in arrears + Preferred Dividends to be paid
Total Preferred Dividends in arrears after payment = $2,800,000 + $13,500,000
Total Preferred Dividends in arrears after payment = $16,300,000
Therefore, after the payment of $13,500,000 to preferred stockholders, the company will be in arrears for a total of $16,300,000.
c. If $13,500,000 is earned after taxes and paid out to preferred stockholders, there will be no available amount for common stock dividends. Common stock dividends are paid after preferred stock dividends have been paid in full. Since the company is already in arrears for preferred dividends, there would be no remaining funds available for common stock dividends.