Question

A company has 1,500 shares of 7%, $100 par value preferred stock the company issued at the beginning of Year 1. All remaining shares are common stock. The company was not able to pay dividends in Year 1, but plans to pay dividends of $24,000 in Year 2. Required: 1. & 2. How much of the $24,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in Year 2, assuming the preferred stock is cumulative? What if the preferred stock were noncumulative?

Answer 1

Answer:

Cumulative Preferred Stock Dividend = $21,000

Non-Cumulative Preferred Stock Dividend = $10,500

Explanation:

Cumulative Preferred Stock:

In cumulative, the dividends accumulate for the past year if they are not paid and will be paid in future. Therefore, in Year 2, the company will pay dividend to cumulative preferred stock holder for both the years:

Dividend = (1500 * 7% * 100) * 2

Dividend = 10,500 * 2

Dividend = $21,000

Non-Cumulative Preferred Stock:

In non-cumulative, the dividends are paid for the current year only and the dividend for past if they are not paid does not consider in dividend payments. The calculation will be:

Dividend = 1500 * 7% * 100

Dividend = $10,500