Question

Raphael Corporation’s common stock is currently selling on a stock exchange at $85 per share, and its current balance sheet shows the following stockholders’ equity section: Preferred stock—5% cumulative, $___ par value, 1,000 shares authorized, issued, and outstanding $ 50,000 Common stock—$___ par value, 4,000 shares authorized, issued, and outstanding 80,000 Retained earnings 150,000 Total stockholders' equity $ 280,000 Problem 11-5A Part 5 5.1 If two years’ preferred dividends are in arrears and the board of directors declares cash dividends of $11,500, what total amount will be paid to the preferred and to the common shareholders?

Answer 1

Answer:

Total preference dividend = $7,500

Equity dividend = $11,500 - $7,500 = $4,000

Explanation:

Total of stockholder's equity = $280,000

Less: Retained Earnings = $150,000

Less: Equity = $80,000

Preference Capital = $50,000

Rate of preference capital = 5%

Preference Dividend if in arrears would have to be paid first in priority to Equity.

Total preference dividend in arrears = $50,000 $\times$ 5% = $2,500 per year

For 2 years = $2,500 $\times$ 2 = $5,000

In the current year also firstly preference will be paid, therefore current year preference dividend = $2,500

Total preference dividend = $7,500

Equity dividend = $11,500 - $7,500 = $4,000