Question

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.

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, how much will the company be in arrears (behind in payments)? Keep in mind that the coming year would represent the sixth year.

Short answer

The dividend in arrears will be $500,000.

Step-by-step solution

Information provided in the question

Annual dividend to be paid = $8 per share

Preferred stock outstanding = 350,000

Time for which dividends have to be paid = 5 years

Earnings after taxes before dividends = $13,500,000

Calculation of dividend in arrears

The dividend in arrears is $500,000.

$\begin{array}{c}\mathbf{Dividend}\mathbf{}\mathbf{in}\mathbf{}\mathbf{arrears}\mathbf{=}\mathbf{\left(}\begin{array}{c}\mathbf{Annual}\mathbf{}\mathbf{dividend}\mathbf{}\mathbf{per}\mathbf{}\mathbf{share}\\ \mathbf{\times }\mathbf{Shares}\mathbf{}\mathbf{outstanding}\\ \mathbf{\times }\mathbf{Time}\mathbf{}\mathbf{for}\mathbf{}\mathbf{which}\mathbf{}\mathbf{arrears}\mathbf{}\mathbf{are}\mathbf{}\mathbf{due}\end{array}\mathbf{\right)}\\ \mathbf{-}\mathbf{Earnings}\mathbf{}\mathbf{after}\mathbf{}\mathbf{taxes}\mathbf{}\mathbf{before}\mathbf{}\mathbf{dividends}\\ \mathbf{=}\mathbf{(}\mathbf{\$}\mathbf{8}\mathbf{\times }\mathbf{350}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{6}\mathbf{)}\mathbf{-}\mathbf{\$}\mathbf{13}\mathbf{,}\mathbf{500}\mathbf{,}\mathbf{000}\\ \mathbf{=}\mathbf{\$}\mathbf{14}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{13}\mathbf{,}\mathbf{500}\mathbf{,}\mathbf{000}\\ \mathbf{=}\mathbf{\$}\mathbf{500}\mathbf{,}\mathbf{000}\end{array}$