A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual dividend. The firm also has 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid prior to paying dividends to common stockholders at the end of third year?
A) $8,000
B) $16,000
C) $24,000
D) $25,000

Question

Quizplus · Accepted Answer

The preferred stockholders are entitled to receive their dividend payments before the common stockholders can receive any dividend payments. Since the board of directors has passed the preferred dividend for the prior two years, the cumulative preferred dividend that has accrued is:

2 years × 1,000 shares × $100 par value × 8% annual dividend rate = $16,000

Therefore, the preferred stockholders must be paid $16,000 before any dividends can be paid to the common stockholders.

A Firm Has an Outstanding Issue of 1,000 Shares of Preferred