Question

You are considering purchasing the preferred stock of a firm but are concerned about its capacity to pay the dividend. To help allay that fear, you compute the times-preferred-dividend-earned ratio for the past three years from the following data taken from the firm’s financial statements:

Year -----------------------------------------20X1-------------------------- 20X2------------------- 20X3

Operating income -----------------------$16,000,000 ----------------$13,000,000 ----------$14,000,000

Interest ------------------------------------6,700,000 --------------------3,700,000 --------------5,900,000

Taxes --------------------------------------4,600,000 ---------------------5,100,000 -------------5,100,000

Preferred dividends --------------------600,000 -----------------------800,000 -----------------1,200,000

Common dividends --------------------3,000,000 ----------------------3,300,000 --------------______

Round your answers to two decimal places.

20X1:_______

20X2:_______

20X3:_______

What does your analysis indicate about the firm’s capacity to pay preferred stock dividends?

Times preferred dividend earned has ________ each year, which indicates the firm's capacity to pay the dividend has _______ .

Answer 1

I gave detailed explanation. Please upvote. If doubt please comment.