Giant Redwood Toothpick Products LLC will end 2014 with a net profit before tax of $200,000. The company is subject to a 40% federal plus state income tax rate, and has 100,000 shares of cumulative preferred stock that normally pay 20 cents per share per year in preferred stock dividends. Giant Redwood Toothpick Products LLC has always paid preferred stock dividends, but has flexibility to not pay when times are bad. There are 100,000 shares of common stock currently outstanding. Giant Redwood Toothpick Products plans on paying dividends to its common stock shareholders in 2014.

a. Calculate Giant Redwood Toothpick Products LLCs 2014 earnings per share.

b. If the firm paid common stock dividends of $0.25 per share per year, how many dollars will go to retained earnings?

c. The toothpick market just collapsed. What will happen to common stock dividends in 2013 if Giant Redwood Toothpick Products LLC suddenly elects to not pay preferred shareholders any dividends in 2013? If they did not pay dividends on preferred stock, what do you think would happen to dividends on common stock, and the prices of shares of preferred and common stock?