In: Accounting
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.