Question

A company has $10 par common stock outstanding with a total par value of $4,000,000 and 5%, $50 par cumulative, nonparticipating preferred stock with a total par value of $3,000,000. No dividend was declared on the stock in the last year. In the current year, the company earned a net income of $1,700,000 and dividends paid, included a dividend of $3 per share on the common stock. What is the total amount of dividend paid to shareholders in the current year?

a.$1,350,000

b.$300,000

c.$1,500,000

d.$1,700,000

Answer 1

Annual dividend on preferred stock = 5% * $3000000 = $150000

Since preferred stock is cumulative, in the current year first dividend in arrears i.e. dividend for last year shall be paid on preferred stock, then regular preferred dividend would be paid.

After that dividend per share of $ 3 would be paid on common stock.

Common stock dividend = $3 * ($4000000/10) = $1200000

Total amount of dividend paid in the current year = Dividend in arrears + Current year preferred dividend + Common stock dividend

= $150000 + $150000 + $1200000

= $1500000

Total dividend = $1500000

Option c is correct