Question

Pepsi Co. paid dividends of $7,000; $11,000; and $14,000 during Year 1, Year 2, and Year 3, respectively. The company had 1,400 shares of 7.0%, $100 par value preferred stock outstanding that paid a cumulative dividend. The amount of dividends received by the common shareholders during Year 3 would be:

A. $4,000.

B. $2,800.

C. $2,600.

D. $9,800.

Answer 1

C. $2,600.

Working:

Preferred stocks are those stock that have preferential right of receiving dividend before common stockholders.
Preferred stock with cumulative dividend means if in any year there is not sufficient dividend for preferred stockholders then
in subsequent years first of all dividend in arrear of previous years and of current year is paid to preferred stockholders and after that
remaining all dividend is paid to common stockholders.
Dividend to preferred stockholders				=	Number of preferred stockholders x Par Value x % of dividend
				=	1400	x	$        100	x	7.0%
				=	$       9,800
Now payment of dividend in all years is calculated as follows:
Year -1:
Total dividend
Dividend payable to peferred stockholders			$    9,800
Dividend paid to preferred stockholders			$    7,000
Dividend in arrear for preferred stockholders			$    2,800
Year -2:
Total dividend			$ 11,000
Dividend in arrear			$    2,800
			$    8,200
Current Year dividend to preferred stockholders			$    8,200
Dividend in arrear			$    1,600
Year-3:
Total dividend			$ 14,000
Dividend in arrear			$    1,600
			$ 12,400
Current Year dividend to preferred stockholders			$    9,800
Dividend to common stockholders			$    2,600