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 not paid the preferred dividend for the prior two years,how much must the preferred stockholders be paid (in total,not per share)prior to paying dividends to common stockholders at the end of third year?

Question

Quizplus · Accepted Answer

The total amount of unpaid dividends for the past two years is $100 x 1,000 shares x 8% x 2 years = $16,000. This amount must be paid to the preferred stockholders before any dividends can be paid to common stockholders. Therefore, the correct answer is $16,000.

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