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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

01

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.

02

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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Most popular questions from this chapter

Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers & Chance is attempting to price the issue. The car rental industry generally trades at a 20 percent discount below the P/E ratio on the Standard & Poor’s 500 Stock Index. Assume that index currently has a P/E ratio of 25. The firm can be compared to the car rental industry as follows:

Richmond

Car Rental Industry

Growth rate in earnings per share.....

15%

10%

Consistency of performance.............

Increased earnings

4 out of 5 years

Increased earnings

3 out of 5 years

Debt to total assets.....................

52%

39%

Turnover of product.........................

Slightly below average

Average

Quality of management..................

High

Average

Assume, in assessing the initial P/E ratio, the investment banker will first determine the appropriate industry P/E based on the Standard & Poor’s 500 Index. Then a half point will be added to the P/E ratio for each case in which Richmond Rent-A-Car is superior to the industry norm, and a half point will be deducted for an inferior comparison. On this basis, what should the initial P/E be for the firm?

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public.

The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows:

In \( millions
In \) millions

Current assets

\(70

Current liabilities

\)30

Fixed assets

\(70

Long-term liabilities

\)30

Total liabilities

\(60

Stockholder’s equity

\)80

Total assets

\(140

Total stockholder’s equity and liabilities

\)140

The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.

c. Compute total debt to total assets on the original and revised balance sheets.

The Hardaway Corporation plans to lease a $740,000 asset to the O’Neil Corporation. The lease will be for 11 years.

a. If the Hardaway Corporation desires a 13 percent return on its investment, how much should the lease payments be?

The Pioneer Petroleum Corporation has a bond outstanding with an \(85 annual interest payment, a market price of \)800, and a maturity date in five years. Find the following:

a. The coupon rate.

b. The current rate.

c. The yield to maturity
See all solutions

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