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
|
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
|
1,500,000
|
|
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.