Question

Time Watch Co. has $\mathbf{\backslash (}\mathbf{46}$ million in earnings and is considering paying $\mathbf{\backslash )}\mathbf{6}\mathbf{.}\mathbf{45}$ million in interest to bondholders and $\mathbf{\$}\mathbf{4}\mathbf{.}\mathbf{35}$ million to preferred stockholders in dividends.

b. What are the preferred stockholders’ immediate contractual claims to payment$\mathbf{?}$ What privilege do they have?

Short answer

The preference shareholders do not have any immediate contractual claim to payment. These shareholders are subject to receiving their dividends before the earnings are distributed to the equity shareholders.

Step-by-step solution

Preferred stockholder’s contractual claim

The preference shareholders cannot make any immediate contractual claim to payment from the company.

The privilege of preference shareholders

The preference shareholders have the privilege of receiving the dividend before the earnings are distributed to the common stockholders.The company has the liability to pay preference dividends based on the rate of return determined at the time of issue of preference shares.