preferred dividend coverage business definition

The measure of a firm's ability to meet its dividend obligations on preferred stock. The greater the coverage, the less the chance that management will pass a dividend. Several methods are utilized to calculate preferred dividend coverage. The most common is to divide net income by the annual preferred dividend commitment. A more conservative measure is to divide earnings before taxes and fixed charges by fixed charges plus the pretax preferred dividend. The latter is calculated as the preferred dividend divided by one minus the firm's tax rate.