A cumulative preferred stock pays a quarterly dividend of $1.25. 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 its preferred and common shareholders. How much will it have to pay to the preferred shareholders per share to do this?

Question

Quizplus · Accepted Answer

Since the preferred stock is cumulative, the missed dividends will accumulate and must be paid before any dividends are paid to common shareholders. The issuing firm has missed two quarterly dividends, so the amount owed to preferred shareholders is:
2 quarters x $1.25 per quarter = $2.50 per share
To pay this amount plus the current quarter's dividend of $1.25, the firm must pay a total of $3.75 per share to its preferred shareholders. Therefore, the correct answer is C.

A Cumulative Preferred Stock Pays a Quarterly Dividend of $1