Assume CGM Corp has issued and outstanding 22,000 shares of 5%, $25 par value preferred stock...

Assume CGM Corp has issued and outstanding 22,000 shares of 5%, $25 par value preferred stock and issued and outstanding 15,000 shares of $15 stated value common stock. The board of directors declares dividends of $100,000 on December 15, 2020, the preferred stock is cumulative, and dividends paid to the preferred stockholders has been as follows: 2017 - $13,750; 2018 - $13,750; and 2019 - $15,000. What amount is allocated to common stockholders?

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Expert Solution

It is given that preferred stocks are cumulative, it means that they should get dividend every year and if for any year no or partial dividend is paid to them then the company should pay such balance dividend in the upcoming year.

Dividend per year for preferred stock = Preferred shares outstanding * Par value * % of dividend = 22,000 * $25 * 5% = $27,500

So, from year 2017 to year 2019 a total of $82,500 [i.e. $27,500 * 3 years ] dividend the company should have paid to the preferred stockholders, but the company actually paid a total of only $42,500 [ i.e. $13,750 + $13,750 + $15,000 ] dividend. It means that $40,000 [ i.e. $82,500 - $42,500 ] dividend is in arrear and the company should pay this dividend in the upcoming years

Calculation of amount of dividend allocated to common stockholders :

	$
Total dividend declared in 2020	100000
(-) Dividend in arrear of preferred stock	-40000
(-) Dividend to preferred stockholders for 2020	-27500
Dividend allocated to common stockholders	32500

ekkarill92 answered 1 year ago

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