A company has outstanding 10 million shares of $2 par common stock and 1 million shares of $4
par preferred stock. The preferred stock has an 8% dividend rate. The company declares
$300,000 in total dividends for the year. Which of the following is true if the preferred
stockholders have a cumulative dividend preference?
A.)
Preferred stockholders will receive the entire $300,000, and they must also be paid $20,000
before the end of the current accounting period. Common stockholders will receive nothing.
B.)
Preferred stockholders will receive $24,000 (8% of the total dividends). Common
stockholders will receive the remaining $276,000.
C.)
Preferred stockholders will receive the entire $300,000, and they must also be paid $20,000
sometime in the future before common stockholders will receive anything.
D.)
Preferred stockholders will receive the entire $300,000, but will receive nothing more
relating to this dividend declaration. Common stockholders will receive nothing.
Solution
Preferred stockholders will receive the entire $300,000, and they must also be paid $20,000
sometime in the future before common stockholders will receive anything.