You are considering purchasing the preferred stock of a firm but are concerned a
ID: 2630960 • Letter: Y
Question
You are considering purchasing the preferred stock of a firm but are concerned about its capacity to pay the dividend. To help allay that fear, you compute the times-preferred-dividednd-earned ratio for the past three years from the following data taken from thefirms financial statements:
Year 20x1 20x2 20x3
Operating income $12,000,000 $15,000,000 $17,000,000
Interest $3,000,000 $5,900,000 $11,000,000
Taxes $4,000,000 $5,400,000 $4,000,000
Preferred dividends $1,000,000 $1,000,000 $4,000,000
Common dividends $3,000,000 $2,000,000 ------------
What does your analysis indicate about the firm's capacity to pay preferred stock dividends?
Please explain in detail and show all work. Thank you:-)
Explanation / Answer
Year
X1
X2
X3
Operating Income
$ 12,000,000
$ 15,000,000
$ 17,000,000
Interest
(3,000,000)
(5,900,000)
(11,000,000)
Taxes
(4,000,000)
(5,400,000)
(4,000,000)
Net Income
$ 5,000,000
$ 3,700,000
$ 2,000,000
Preferred Dividends
$ 1,000,000
$ 1,000,000
$1,500,000
Times-Preferred-Dividend-Earned
5.00
3.70
1.33
What does your analysis indicate about the firm
Year
X1
X2
X3
Operating Income
$ 12,000,000
$ 15,000,000
$ 17,000,000
Interest
(3,000,000)
(5,900,000)
(11,000,000)
Taxes
(4,000,000)
(5,400,000)
(4,000,000)
Net Income
$ 5,000,000
$ 3,700,000
$ 2,000,000
Preferred Dividends
$ 1,000,000
$ 1,000,000
$1,500,000
Times-Preferred-Dividend-Earned
5.00
3.70
1.33
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