Sweet Company’s outstanding stock consists of 1,900 shares of cumulative 5% preferred stock with a $100...

Sweet Company’s outstanding stock consists of 1,900 shares of cumulative 5% preferred stock with a $100 par value and 10,900 shares of common stock with a $10 par value. During the first three years of operation, the corporation declared and paid the following total cash dividends.

	Dividends Declared & Paid
Year 1	$	2,900
Year 2	$	6,900
Year 3	$	36,500

The total amount of dividends paid to preferred and common shareholders over the three-year period is:

Multiple Choice

$16,400 preferred; $29,900 common.
$28,500 preferred; $17,800 common.
$21,900 preferred; $24,400 common.
$9,500 preferred; $36,800 common.
$19,000 preferred; $27,300 common.

Expert Solution

Preferred stock is a class of corporation stock offered to investors as part of the corporation's capital raising through equity financing. In terms of dividend payment, preferred shares are always first in order than common shares.

Preferred shares are cumulative, meaning that all unpaid dividends from the previous years are accumulated until such time the company can pay its dividends. Sweet Company has not paid the preferred share dividends for three years.
The company has 1,900 shares of cumulative preferred shares of $100, bearing 5% cumulative dividend.

Preferred Share Dividends = $100 × 5% × 1,900 = $9,500

Preferred share dividends for 3 years = $9,500 × 3 =$28,500

The remaining dividends declared are free to distribute to the common shareholders.

To compute and validate our choice of answer:

Dividends available for common shareholders = Total of dividends - Preferred share dividends for 3 years

Total of dividends = $2,900 + $6,900 + $36,500 = $46,300

Dividends for common shareholders = $46,300 - $28,500 =$ 17,800.

Hence, The correct answer is b) $28,500 preferred; $17,800 common.

ekkarill92 answered 1 year ago

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