Question

A Corporation had the following stock as part of its stockholders equity:

-7%, $100 par Cumulative Preferred Stock, 45,000 shares authorized, 12,000 shares issued, 10,000 shares outstanding.

- $8 par, Common Stock, 250,000 shares authorized, 140,000 shares issued, 110,000 shares outstanding.

No dividends were declared in the past two years. In the current year, $300,000 is declared as dividend. The Dividend received

by common shareholders will be:

a.

$90,000

b.

$0

c.

$216,000

d.

$48,000

Answer 1

• Working

	Par Value per Preferred Share	Dividend rate	Dividend per Preferred Share	No. of Preferred Shares outstanding	Preferred Dividend
Annual Preferred Dividend:	$                        100	7.00%	$                   7.000	10,000	$            70,000.00

• The above working shows that Annual Preferred Dividend is $ 70,000

Preferred stock here are CUMULATIVE. This means that if in any year, amount of dividend paid to preferred stockholder is LESS than $ 70,000, such ‘short’ amount gets accumulated as ‘arrears’ of dividend.

When the amount of dividend declared is sufficient to pay off the ‘arrear’ the cumulated amount gets paid.

• Answer working

	Total Cash Dividend paid	Paid to Preferred	Paid to Common	Dividends in Arrears at Year end
Year 1	$                           -	$                          -	$                          -	$          70,000.00 [for Year #1]
Year 2	$                           -	$                          -	$                          -	$          140,000.00 [for Year #1 and #2]
Year 3	$          300,000.00	$        210,000.00 [Year #1 70,000 + Year #2 70,000 + Year 3 70,000]	$           90,000.00 = ANSWER [300000 – 210000]	$                          -

• Correct Answer = Option ‘A’ $ 90,000