Question

Emily Company has 20,000 shares of cumulative preferred stock outstanding, with annual dividends paid at a rate of $2 per share. The company also has 40,000 shares of common stock outstanding. Preferred dividends are in arrears from the prior year and the number of shares remained the same for this year and last year. If the company declares a $400,000 dividend in the current year, each outstanding share of common stock would receive:

Answer 1

Answer:

$8.00

Explanation:

Preference Stock has preference when it comes to payment of dividends. The remainder is paid to common stock. When the preference stocks are cumulative, the previous dividends outstanding have to be paid up before current year dividends.

Preference Dividend :

Preference Dividend = 20,000 shares x $2 = $40,000

Thus in current year $80,000 dividend ($40,000 x 2) need to be paid up

Common Stock Dividend :

Dividend = $400,000 - $80,000 = $320,000

Dividend per stock = $320,000 ÷ 40,000 shares = $8.00

therefore,

Each outstanding share of common stock would receive: $8.00