Question

Dedrick Inc. did not pay dividends in 2018 or 2019, even though 43,000 shares of its 8.0% stock, $70 par value cumulative stock were outstanding during those years. The company has 230,000 shares of $2 par value common stock outstanding.

Required:

a. Calculate the annual dividend per share obligation on the preferred stock (Round to 2 decimal places)

b. Calculate the amount that would be received by an investor who has owned 190 of preferred stock and 450 shares of common stock since 2017 if a $0.45 per share common stock dividend is paid at the end of 2020 (Do not round intermediate calculations)

Answer 1

Answer a)

Calculation of Annual dividend per share obligation on Preferred stock

Annual dividend per share = Par value per share of preferred stock X Rate of dividend on preferred stock

                                                        = $ 70 per share X 8%

                                                         = $ 5.60 per share

Therefore annual dividend per share obligation is $ 5.60

Answer b)

Calculation of amount of dividend received by the investor who had 190 shares of preferred stock and 450 shares of common stock

Amount of dividend received = Amount of dividend received on preferred stock + Amount of dividend received in Common stock

                                                       = $ 3,192 + $ 202.50

                                                        = $ 3,394.50

Therefore, total amount of dividend received by the investor is $ 3,394.50.  

Working Note:

Calculation of amount of dividend received on preferred stock:

The shares of preferred stock are cumulative in nature. Since there is no dividend paid in the year 2018 and 2019, dividend for these two years will be paid along with preferred stock dividend for the year 2020. Thus the investor would receive dividend on preferred stock for 3 years in the year 2020.

Amount of dividend received on preferred stock = (Number of shares of preferred stock held X Par value per share X rate of dividend on preferred stock X Number of years of unpaid dividend)

                                                                                                  = 190 shares X $ 70 per share X 8% X 3 years

                                                                                                   = $ 3,192

Therefore amount of dividend received by the investor on preferred stock is $ 3,192.

Calculation of amount of dividend received on Common stock:

Amount of dividend received on common stock = Number of shares of common stock held X Dividend per share on common stock

                                                                                        = 450 shares X $ 0.45 per share

                                                                                          = $ 202.50

Therefore amount of dividend received on common stock is $ 202.50.