Question

National Health Corporation (NHC) has a cumulative preferred stock issue outstanding, which has a stated annual dividend of $10 per share. The company has been losing money and has not paid preferred dividends for the last five years. There are 510,000 shares of preferred stock outstanding and 810,000 shares of common stock.

a. How much is the company behind in preferred dividends? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g. $1,234,000).)
  

	Preferred dividends in arrears

b. If NHC earns $21,500,000 in the coming year after taxes but before dividends, and this is all paid out to the preferred stockholders, how much will the company be in arrears (behind in payments)? Keep in mind that the coming year would represent the sixth year. (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g. $1,234,000).)
  

	Amount still in arrears

Answer 1

Req A: Preferred dividend in arrears: $ 25500,000

The explanation is as follows: Number of preferred stock: 510,000

Stated preferred dividend per tock: $ 10

Annual preferred dividend (510,000 shares @$10) = $ 5100,000

Number of years Preferred dividend in arrears: 5 years.

Therefore, the total amount of preferred dividend in arrears is $ 25500,000 (i.e. $5100,000 *5 years)

Req B: Amount still in arrears is $ 9100,000

The explanation is as foolows:

Now, after one year, Number of years preferred dividend in arrears: 6 years

Total preferred dividend in arrears ($5100,000 *6 years) = $ 30600,000

Less: Amount paid in year-6:                                              $ 21500,000

Amount of preferred dividend still in arrears:                      $9100,000