Question

A company has 1,000 shares of $50 par value, 4.5% cumulative and nonparticipating preferred stock and 10,000 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

Answer: $3500

Explanation:

Preferred stock:

Number of shares = 1000

Par value = $50

4.5% cumulative

Common stock:

Number of shares = 10000

Par value = $10

Total first-year cash dividend paid = $1000

The cash dividend that must be paid to preferred stockholders in the second year before any dividend is paid to common stockholders is:

Preferred Stock dividend = 1000 × 0.045 × 50 = $2250

Unpaid dividend from year 1 = $2250 - $1000 = $1250

Year 2 dividend = $2250

Total dividend due in year 2 = $(1250 + 2250) = $3500