18BP-c National Health Corporation (NHC... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 5: 18BP-c (page 570)

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

Expert verified

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.

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Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder鈥檚 claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder鈥檚 claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder鈥檚 claims	\)900,000
Total liabilities and stockholder鈥檚 claims	$8,500,000

Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder鈥檚 claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder鈥檚 claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder鈥檚 claims	\)900,000
Total liabilities and stockholder鈥檚 claims	$8,500,000

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Short Answer

Step by step solution

Meaning of equity dividend

Dividend available for common stockholders

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