you are considering purchasing the preferred stock  of a firm but are concerned  about its capacity to pay dividend. to help allay that fear, you compute the time-preferred-dividend-eraned ratio for the past three years from the following data taken from the firms financial statements.Year                                   20x1                  20X2                        20X3Operating income         $12,000,000          $15,000,000             $17,000,000Interest                             3,000,000             5,900,000               11,000,000Taxes                                  4,000,000            5,400,000               4,000,000Preferred dividends           1,000,000            1,000,000                1,500,00Common dividends           3,000,000             2,000,00                 - What does your analysis about the firm's capacity to pay preferred stock dividens?

Question
Asked Mar 11, 2019
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 you are considering purchasing the preferred stock  of a firm but are concerned  about its capacity to pay dividend. to help allay that fear, you compute the time-preferred-dividend-eraned ratio for the past three years from the following data taken from the firms financial statements.

Year                                   20x1                  20X2                        20X3

Operating income         $12,000,000          $15,000,000             $17,000,000

Interest                             3,000,000             5,900,000               11,000,000

Taxes                                  4,000,000            5,400,000               4,000,000

Preferred dividends           1,000,000            1,000,000                1,500,00

Common dividends           3,000,000             2,000,00                 -

 

What does your analysis about the firm's capacity to pay preferred stock dividens?

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Expert Answer

Step 1

Dividends: The term dividends allude to that portion of proceeds of an organization which is circulated by the organization among its investors. It is the remuneration of the investors for investments made by them in the shares of the organization. 

Step 2

The analysis about the firm’s capacity to pay preferred stock dividends are as follows:

To determine the firm’s capacity to pay preferred stock dividends, it is necessary to calculate the Times Preferred Dividends Earned. An excel spreadsheet is used to calculate the Times Preferred Dividends Earned which is shown below:

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Step 3

The excel spreadsheet workings are shown below:

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