A firm had a major fire which 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 $1.50 for the cumulative preferred shares and $0.95 for the common shares. How much will the firm need to pay the preferred shareholders per share if the firm also pays a common dividend?

Question

Quizplus · Accepted Answer

The firm must pay the cumulative preferred shareholders for the missed dividends before paying common dividends. Since the preferred dividend is $1.50 per quarter and was missed for four quarters, the firm owes $6.00 in arrears. Adding the current quarter's $1.50, the total is $7.50 per share.

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