California Adventures issues 5,000 shares of 8%,$100 par value preferred stock at the beginning of 2011.All remaining shares are common stock.The company was not able to pay dividends in 2011,but plans to pay dividends of $100,000 in 2012.Assuming the preferred stock is cumulative,how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2012?

Question

Quizplus · Accepted Answer

Since the preferred stock is cumulative, dividends in arrears from 2011 must be paid before any dividends are paid to common stockholders. The annual dividend for preferred stock is 8% of $100 par value, which is $8 per share. For 5,000 shares, this is $40,000 for two years (2011 and 2012). Therefore, $40,000 will be paid to preferred stockholders, leaving $60,000 for common stockholders.

California Adventures Issues 5,000 Shares of 8%,$100 Par Value Preferred