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.

c. How much, if any, would be available in common stock dividends in the coming year if \)13,500,000 is earned as explained in part b?

Short answer

The company cannot pay any dividend to common stockholders until they clear the dividend in arrears due to preferred stockholders.

Step-by-step solution

Meaning of equity dividend

The dividend provided by a company to its equity shareholders is called an equity dividend. This dividend is usually paid by those companies that are profitable and well-established.

Dividend available for common stockholders

The company will be unable to pay any dividends to common stockholders as they still have arrears in preferred dividends even after utilizing their earnings after taxes.The company can only pay a dividend to equity shareholders after they have paid the dividend to preferred shareholders.