A corporation has 5,000 shares of $5 par, 6% cumulative preferred stock outstanding and 25,000 shares of $2 par common stock outstanding. No dividends have been paid for the past 2 years. If the company wishes to distribute $2 per share to the common stockholders this year, what is the total amount of dividends that must be paid?

Question

Quizplus · Accepted Answer

To determine the total amount of dividends that must be paid, we need to consider the preferred stock dividends that are in arrears due to the cumulative feature, as well as the desired $2 per share dividend for the common stockholders.
First, let's calculate the dividends in arrears for the preferred stock:
Each share of preferred stock has a $5 par value and pays a 6% dividend. The annual dividend per preferred share is therefore:
$5 * 6% = $0.30 per share
Since no dividends have been paid for the past 2 years, the dividends in arrears for each preferred share are:
2 years * $0.30 per year = $0.60 per share
With 5,000 shares of preferred stock outstanding, the total dividends in arrears are:
5,000 shares * $0.60 per share = $3,000
Now, let's calculate the current year's preferred stock dividend:
5,000 shares * $0.30 per share = $1,500
Before any dividends can be paid to common stockholders, the company must pay the current year's preferred dividends and clear any dividends in arrears for the preferred stockholders. So, the total amount that must be paid to preferred stockholders is:
Dividends in arrears + Current year's preferred dividends = $3,000 + $1,500 = $4,500
Next, we calculate the dividend for the common stockholders:
There are 25,000 shares of common stock, and the company wishes to distribute $2 per share:
25,000 shares * $2 per share = $50,000
Finally, we add the total preferred dividends to the total common dividends to find the total amount of dividends that must be paid:
Preferred dividends (arrears + current) + Common dividends = $4,500 + $50,000 = $54,500
Therefore, the correct answer is:
d. $54,500

A Corporation Has 5,000 Shares of $5 Par, 6% Cumulative