A cumulative preferred stock pays a quarterly dividend of $1.50. The issuing firm is experiencing some cash shortfalls and has not paid the dividend for the last two quarters. The current situation is expected to be corrected within the month. Next month, the firm wants to pay dividends to both their preferred and their common shareholders. How much will they have to pay to the preferred shareholders to do this?

Question

Quizplus · Accepted Answer

The preferred shareholders are entitled to receive all of the dividends that they missed during the period of non-payment before the common shareholders can receive any dividends. Therefore, the firm will have to pay a total of $3.00 ($1.50 x 2) to the preferred shareholders for the missed dividends. Additionally, they will have to pay the regular quarterly dividend of $1.50 for the current quarter. Therefore, the total amount that the firm will have to pay to the preferred shareholders is $4.50.

A Cumulative Preferred Stock Pays a Quarterly Dividend of $1