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?
A) $ 8,000
B) $16,000
C) $24,000
D) $25,000

Question

Quizplus · Accepted Answer

Since the preferred dividend was passed for two years, the total amount owed to the preferred shareholders is:
(1,000 shares x $100 par value x 8% dividend rate) x 2 years
= $16,000
This amount must be paid to the preferred shareholders prior to distributing any dividends to the common shareholders.

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