Question

Torino company has 2,100 shares of $10 par value, 6.5% cumulative and nonparticipating preferred stock and 21,000 shares of $10 par value common stock outstanding. the company paid total cash dividends of $1,000 in its first year of operation. the cash dividend that must be paid to preferred stockholders in the second year before any dividend is paid to common stockholders is:

Answer 1

The given preferred stock is cumulative and hence any unpaid dividend shall be cumulated and paid in next year.

The Annual preferred dividend is calculated as follows:

2100 shares * $10 par value * 6.5%= $1,365

In the first year, the dividend paid to preferred stock is $1,000, it means unpaid dividend is (1365-1000) = 365, which shall be paid in the second year.

Hence in the second year total dividend payable to preferred shall be $1365+ 365 = $1,730

Hence, the cash dividend that must be paid to preferred stockholders in the second year before any dividend is paid to common stockholders is $1,730