Wetzel, Inc. has 20,000 shares of cumulative preferred stock outstanding, with annual dividends paid at a rate of $1 per share. Wetzel, Inc. also has 40,000 shares of common stock outstanding. Preferred dividends were passed in the prior year. If Wetzel, Inc. declares a $700,000 dividend, each outstanding share of common stock would receive: (Round your answer to the nearest cent.)

Question

Quizplus · Accepted Answer

Explanation: Since the preferred stock is cumulative and dividends were passed in the prior year, Wetzel, Inc. must first pay the preferred shareholders for both the current and prior year before distributing dividends to common shareholders. This amounts to $40,000 (20,000 shares x $1 x 2 years). After paying the preferred dividends, $660,000 remains for the common shareholders. Dividing $660,000 by 40,000 shares of common stock gives $16.50 per share.