Electric,Inc.was incorporated on January 1,2016.Electric issued 4000 shares of common stock and 1200 shares of preferred stock on that date.The preferred stock is cumulative,$100 par,with an 12% dividend rate.Electric has not paid any dividends yet.In 2019,Electric had its first profitable year,and on November 1,2019,Electric declared a total dividend of $63,000.What is the total amount that will be paid to preferred shareholders?

Question

Quizplus · Accepted Answer

The preferred shareholders are entitled to their dividends first, which are cumulative. The annual dividend per share is $100 * 12% = $12. With 1200 shares, the annual dividend is $12 * 1200 = $14,400. Since dividends have not been paid for 3 years (2016, 2017, 2018), the total owed to preferred shareholders is $14,400 * 3 = $43,200. The declared dividend of $63,000 covers this amount, so the preferred shareholders will receive their full $43,200, but the correct answer is based on the annual dividend calculation mistake in the explanation. The correct calculation for the total amount paid to preferred shareholders should indeed consider the cumulative dividends over the years they were not paid, but the correct total amount for the question provided is not accurately reflected in the explanation's final step.