Chapter 5: 18BP-a (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.
a. How much is the company behind in preferred dividends?

Short Answer

Expert verified

The company is $14,000,000 behind in preferred dividends.

Step by step solution

Information provided in the question

Annual dividend to be paid = $8 per share

Preferred stock outstanding = 350,000

Time for which dividends have to be paid = 5 years

Calculation of dividend in arrears

The dividend in arrears is $14,000,000.

$\begin{matrix} Dividend in arrears = Annual dividend per share \\ \times Shares outstanding \\ \times Time for which arrears are due \\ = $ 8 \times 350, 000 \times 5 \\ = $ 14, 000, 000 \end{matrix}$

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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’s 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	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	$8,500,000

Short Answer

Step by step solution

Information provided in the question

Calculation of dividend in arrears

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