Management Question

Learning Goal: I’m working on a management multi-part question and need an explanation and answer to help me learn.

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 480,000 shares of preferred stock outstanding and 780,000

shares of common stock.

a. How much is the company behind in preferred dividends? (Do not round

intermediate calculations. Input your answer in dollars, not millions (e.g.


Preferred dividends in arrears

b. If NHC earns $20,000,000 in the coming year after taxes but before dividends,

and this is all paid out to the preferred stockholders, how much will the company

be in arrears (behind in payments)? Keep in mind that the coming year would

represent the sixth year. (Do not round intermediate calculations. Input your

answer in dollars, not millions (e.g. $1,234,000).)

Amount still in arrears

c. Can the firm pay any common stock dividends if the conditions in part b exist?

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