Ajax had 5,000 shares of 8% PV=100 preferred stock If the stock is cumulative and the...

Ajax had 5,000 shares of 8% PV=100 preferred stock

If the stock is cumulative and the company did not have any money

in 2019 but could pay 95000 in 2020 How much would the common

stockholders get in 2020?

1.95000

2.40000

3.15000

Expert Solution

Cumulative preferred stock includes a provision that requires the company to pay preferred shareholders all dividends, including those that were omitted in the past, before the common shareholders are able to receive their dividend payments. It means if the payments to the cumulative preference share holder could not be effected due to lack of money, it must be paid later, but before the payment to the common share holder.

Preference dividend in 2019 = 5000*100*8% = 40000

Preference dividend in 2020 = 5000*100*8% = 40000

The company could pay 95000 in 2020. Out of this 95000, the preference dividend for the year 2019 and 2020 have to be paid first to the preference share holders and the balance will be paid to the common shareholders. Payment for both years have to be made to the preference share holders as the preference shares are Cumulative preference shares.

Amount to be paid to common share holders = 95000-(40000+40000) = 15000

ekkarill92 answered 1 year ago

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