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-dividend-earned ratio for the past three years from the following data taken from the firm’s financial statements: Year 20X1 20X2 20X3Operating income$18,000,000$16,000,000$14,000,000Interest 6,500,000 5,500,000 3,300,000Taxes 4,200,000 4,800,000 5,400,000Preferred dividends 1,500,000 800,000 700,000Common dividends 2,500,000 3,500,000 — Round your answers to two decimal places.20X1: 20X2: 20X3: What does your analysis indicate about the firm’s capacity to pay preferred stock dividends?Times preferred dividend earned has (declined or increased) each year, which indicates the firm's capacity to pay the dividend has (diminished or improved)

Answered: You are considering purchasing the…

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter12: Corporations: Organization, Stock Transactions, And Dividends

Section: Chapter Questions

Problem 2MAD: Analyze and compare Bank of America and Wells Fargo Bank of America Corporation (BAC) and Wells...

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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-dividend-earned ratio for the past three years from the following data taken from the firm’s financial statements:

Year		20X1		20X2		20X3
Operating income	$	18,000,000	$	16,000,000	$	14,000,000
Interest		6,500,000		5,500,000		3,300,000
Taxes		4,200,000		4,800,000		5,400,000
Preferred dividends		1,500,000		800,000		700,000
Common dividends		2,500,000		3,500,000		—

Round your answers to two decimal places.

20X1:

20X2:

20X3:

What does your analysis indicate about the firm’s capacity to pay preferred stock dividends?

Times preferred dividend earned has (declined or increased) each year, which indicates the firm's capacity to pay the dividend has (diminished or improved)

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The cash distributions that a corporation hands out to its preferential owners are known as the preferred dividends.

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