Chapter 5: 2BP-b (page 566)

Time Watch Co. has $$46$ million in earnings and is considering paying $$ 6.45$ million in interest to bondholders and $$ 4.35$ million to preferred stockholders in dividends.
b. What are the preferred stockholders’ immediate contractual claims to payment $?$ What privilege do they have?

Short Answer

Expert verified

The preference shareholders do not have any immediate contractual claim to payment. These shareholders are subject to receiving their dividends before the earnings are distributed to the equity shareholders.

Step by step solution

Preferred stockholder’s contractual claim

The preference shareholders cannot make any immediate contractual claim to payment from the company.

The privilege of preference shareholders

The preference shareholders have the privilege of receiving the dividend before the earnings are distributed to the common stockholders.The company has the liability to pay preference dividends based on the rate of return determined at the time of issue of preference shares.

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Bailey corporation
Income statement
For the year 20X1
Sales (all on credit)	\(42,680,000
Cost of goods sold	\)32,240,000
Gross profit	\(10,440,000
Selling and administrative expenses	\)4,558,000
Operating profit	\(5,882,000
Interest expense	\)600,000
Net income before taxes	\(5,282,000
Taxes	\)2,120,000
Net income	\(3,162,000

Bailey corporation
Balance sheet
As of December 31, 20X1
Assets
Current assets:
Cash	\)250,000
Marketable securities	\(130,000
Accounts receivables	\)6,000,000
Inventory	\(8,300,000
Total current assets	\)14,680,000
Net plant and equipment	\(13,970,000
Total assets	\)28,650,000
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	\(3,800,000
Notes payable	\)3,550,000
Total current liabilities	\(7,350,000
Long-term liabilities	\)5,620,000
Total liabilities	\(12,970,000
Stockholder’s equity:
Common stock (1,800,000 shares at \)1 par)	\(1,800,000
Capital in excess of par	\)6,300,000
Retained earnings	\(7,580,000
Total stockholder’s equity	\)15,680,000
Total liabilities and stockholder’s equity	\(28,650,000

Time Watch Co. has $\(46$ million in earnings and is considering paying $\) 6.45$ million in interest to bondholders and $$ 4.35$ million to preferred stockholders in dividends.
b. What are the preferred stockholders’ immediate contractual claims to payment $?$ What privilege do they have?

Short Answer

Step by step solution

Preferred stockholder’s contractual claim

The privilege of preference shareholders

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Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Intermediate Accounting

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Operational Management

Study anywhere. Anytime. Across all devices.

Time Watch Co. has \(46 million in earnings and is considering paying \)6.45 million in interest to bondholders and $4.35 million to preferred stockholders in dividends.b. What are the preferred stockholders’ immediate contractual claims to payment? What privilege do they have?

Short Answer

Step by step solution

Preferred stockholder’s contractual claim

The privilege of preference shareholders

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Intermediate Accounting

Managers

Corporate Finance

Introduction to Business

Change Management

Operational Management

Study anywhere. Anytime. Across all devices.

Time Watch Co. has $\(46$ million in earnings and is considering paying $\) 6.45$ million in interest to bondholders and $$ 4.35$ million to preferred stockholders in dividends.
b. What are the preferred stockholders’ immediate contractual claims to payment $?$ What privilege do they have?