Question

There are 3,500 preferred shares outstanding of McDonalds stock with an annual dividend of $2 per share. If McDonalds has not paid a preferred dividend in 6 quarters, how much does it need to pay to preferred shareholders in total before it is able to pay any common dividends? 

$10,500 

$11,200 

$14,800 

$8,000

Answer 1

Answer is $10,500

Annual dividend per share = $2.00
Number of preferred shares outstanding = 3,500

Annual preferred dividend = Annual dividend per share * Number of preferred shares outstanding
Annual preferred dividend = $2.00 * 3,500
Annual preferred dividend = $7,000

Quarterly preferred dividend = Annual preferred dividend / 4
Quarterly preferred dividend = $7,000 / 4
Quarterly preferred dividend = $1,750

Preferred dividend is arrear for 6 quarters

Total preferred dividend in arrear = Quarterly preferred dividend * Number of quarters for which dividend is in arrear
Total preferred dividend in arrear = $1,750 * 6
Total preferred dividend in arrear = $10,500

Therefore, the company has to pay $10,500 to its preferred shareholders before it is able to pay any common dividends.