Wetzel,Inc.has 20,000 shares of cumulative preferred stock outstanding,with annual dividends paid at a rate of $2 per share.Wetzel,Inc.also has 40,000 shares of common stock outstanding.Preferred dividends were passed in the prior year.If Wetzel,Inc.declares a $200,000 dividend,each outstanding share of common stock would receive:

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Since preferred dividends were passed last year, they are cumulative and must be paid before any dividends can be paid to common stockholders. The amount of cumulative preferred dividends not paid is: 20,000 shares x $2 per share = $40,000. Therefore, the $200,000 dividend declared will first go towards paying the $40,000 in preferred dividends, leaving $160,000 to be distributed to common stockholders. Dividing $160,000 by the 40,000 outstanding common shares gives a dividend of $4.00 per share. Therefore, each outstanding share of common stock would receive $4.00 in dividends.