Answer: 1. $21,600 will be paid to Preferred Shares and $1,400 to Common Shares
2. Preferred Shareholders get $10,800 and Common Shareholders get $12,200.
Explanation:
1. When a Preferred Stock is termed as Cumulative, it means that the dividends on the stock must always be paid eventually. This means that if even 3 years go by without paying dividends, the dividends in each of those 3 years are accrued until they can be paid.
The company could not pay dividends in 2020 but have $23,000 to pay in 2021.
Bear in mind that Preferred Shareholders are paid first.
The Dividend owed to them is calculated as,
= 1,800 shares * $100 par value * 6% return
= 1,800 * 100 * 6%
= $10,800
In 2021, the Preferred Shares are entitled to 2 payments of $10,800 for years 2020 and 2021.
= 10,800 * 2
= $21,600
Subtracting that from the total dividends,
= 23,000 - 21,600
= $1,400
$21,600 will be paid to Preferred Shares and $1,400 to Common Shares.
2. If the Preferred stock is non-cumulative then it does not accrue.
In 2021 therefore Preferred Shares will get $10,800 and Common Shareholders will get,
= 23,000 - 10,800
= $12,200
Preferred Shareholders get $10,800 and Common Shareholders get $12,200.
