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Attempts: Score: / 5 3. Problem 14-04 eBook Problem 14-04 You are considering purchasing the preferred...

Attempts: Score: / 5
3. Problem 14-04

eBook
Problem 14-04

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 $ 19,000,000 $ 15,000,000 $ 17,000,000
Interest 7,300,000 5,100,000 9,500,000
Taxes 3,700,000 5,300,000 5,000,000
Preferred dividends 1,500,000 1,300,000 800,000
Common dividends 1,700,000 2,900,000 —
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 .

Solutions

Expert Solution

Times preferred Dividend earned ratio=Net income/preferred Dividend

20X1

Net income=Operating income-Interest -Taxes

=$19,000,000-7,300,000-3,700,000

Net income=$8,000,0000

Preferred dividend=$1,500,000

Times preferred Dividend earned ratio=$8,000,000/$1,500,000

Times preferred Dividend earned ratio=5.33

20X2

Net income=Operating income-Interest -Taxes

=$15,000,000-5,100,000-5,300,000

Net income=$4,600,000

Preferred dividend=$1,300,000

Times preferred Dividend earned ratio=$4,600,000/$1,300,000

Times preferred Dividend earned ratio=3.53

20X3

Net income=Operating income-Interest -Taxes

=$17,000,000-9,500,000-5,000,000

Net income=$2,500,0000

Preferred dividend=$800,000

Times preferred Dividend earned ratio=$2,500,000/$800,000

Times preferred Dividend earned ratio=3.13 (rounded from 3.125)

Firms capcity to pay preferred dividend is declining as its timed preferred dividend earned ratio fall from 5.33 in 20X1 to 3.13 in 20X3 which indicates that while in 20X1 it could pay preferred dividend 5.33 times in 20X1, now in 20X3 it could only pay preferred dividend 3.13 times.


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