A firm had a major fire that hampered operations for the past year. As a result, the firm discontinued all dividends for one year. Next month, the firm will resume paying dividends. The normal quarterly payments are $1.60 for the cumulative preferred shares and $1.30 for the common shares. How much will the firm need to pay the preferred shareholders if they also pay a common dividend?

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Quizplus · Accepted Answer

Preferred shares are often cumulative, meaning if dividends are not paid in any year, they accumulate and must be paid out before any dividends can be paid to common shareholders. Since the firm did not pay dividends for a year, it owes four quarters of dividends for the preferred shares ($1.60 x 4 = $6.40) before it can pay dividends to common shareholders. Since the firm is resuming dividends, it implies they are also paying the accumulated preferred dividends, totaling $6.40 for the missed year, plus the current quarter's dividend of $1.60, totaling $8.00.

A Firm Had a Major Fire That Hampered Operations for the Past