You are considering purchasing the preferred stock of a firm but you’re also concerned about its capacity to pay the dividend.
To help you feel more confident, you compute the times-preferred-dividend-earned ratio for the last three years from the following data taken from the firm’s financial statements.
| Year |
20×1 |
20×2 |
20×3 |
| 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 |
1,500,000 |
| Common Dividends |
3,000,000 |
2,000,000 |
What does your analysis indicate about the firm’s capacity to pay preferred stock dividends? Hint…this will require you to compute net earnings…
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