Question

The company has 20,000 shares of 6%, $45 par preferred stock outstanding. In addition, the company has 100,000 shares of common stock outstanding. The company started business on January 1 of Year 1. Total cash dividends paid during Year 1 and Year 2 were $45,000 and $100,000, respectively. Compute the total dividends paid to common shareholders in both years assuming that the preferred stock is cumulative. Year 1 = $6,000; Year 2 = $54,000 Year 1 = $45,000; Year 2 = $63,000 Year 1 = $0; Year 2 = $37,000 Year 1 = $0; Year 2 = $25,000 Year 1 = $0; Year 2 = $46,000

Answer 1

Note: The Preference shareholders enjoy priority in the payment of dividend over the equity shareholders.

So first, dividend is paid to preferred stockholders and then to equity shareholders.

No. of 6% Preferred Stock	20000
Par Value of Preferred Stock ($)	45
Total Preferred Stock par Value ($)	900000
Preferred Dividend per Year	54000

	Amt in $
Total Dividend paid in Year 1	45000
Dividend paid to preferred stockholders	45000
Dividend paid to equity stockholders	-
Total Dividend paid in Year 2	100000
Pending Dividend of Year 1 paid to preferred stockholders [54000-45000]	9000
Dividend paid to preferred stockholders (Year 2)	54000
Balance Dividend paid to equity stockholders	37000

So Correct Answer is Year 1 = 0, Year 2 = $37,000