Final answer:
Preferred dividends are subtracted from a company's net income to determine the net income available to common stockholders. These payments are a company's profit distribution to shareholders and must be accounted for before calculating the earnings common stockholders will receive.
Step-by-step explanation:
The student is asking about how to calculate the net income (NI) available to common stockholders which involves subtracting preferred dividends from a company's net income. Preferred dividends are payments made to preferred shareholders that must be paid out before any dividends can be issued to common stockholders. Therefore, to arrive at the net income available to common stockholders, one must deduct the total amount of preferred dividends from the earnings after taxes and interest.
When a company distributes its profits in the form of dividends, the shareholders receive a portion proportional to the number of shares they own. Particularly, stable companies, like utility companies and established consumer goods firms, often provide dividends, and these can be an important factor in the decision-making process of financial investors evaluating the value and potential growth of a stock. Decisions about issuing stock or paying dividends are made by the firm's management and are influenced by whether the firm is private or public.
Overall, the concept of present discounted value is important to understand in this context because it relates to what investors are willing to pay now for the expected future stream of dividend payments and potential capital gains from owning the stock.