Parnell, Inc. has 5,000 shares of $5 par, 3% cumulative preferred stock outstanding and 25,000 shares of $2 par common stock outstanding. No dividends have been paid for the past two years. If the company wishes to distribute $2 per share to the common stockholders, what is the total amount of dividends that must be paid in the current year?

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Quizplus · Accepted Answer

The company must first pay the cumulative preferred dividends for the past two years and the current year before paying common stockholders. Preferred dividends per year = 5,000 shares * $5 * 3% = $750. Total preferred dividends for three years = $750 * 3 = $2,250. Then, $2 per share to 25,000 common shares = $50,000. Total dividends = $2,250 + $50,000 = $52,250.