Question

# National Health Corporation (NHC) has a cumulative preferred stock issue outstanding, which has a stated annual...

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 440,000 shares of preferred stock outstanding and 740,000 shares of common stock. a. How much is the company behind in preferred dividends? If NHC earns \$18,000,000 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.

Solution:

a)Calculation of amount of preferred dividends due:

Amount of Preferred dividends due=(Annual dividend*No. of preferred stock outstanding)*No. of years

=(\$10*440,000)*5

=\$22000,000

b)Preferred dividend outstanding at the end of year 6

Accumulated dividend till year 6=Amount of Preferred dividends due till 5 years+Dividend for year 6

=\$22000,000+(\$10*440,000)

=\$26400,000

Preferred dividend outstanding at the end of year 6=Accumulated dividend till year 6-Dividend paid

=\$26400,000-\$18,000,000

=\$8400,000

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