At the beginning of 2007, Emily Corporation issued 10,000 shares of $100 par, 5%, cumulative, preferred stock for $110 per share. No dividends have been paid to preferred shareholders. What amount of dividends will a shareholder owning 100 shares receive in 2009 if Emily pays $1,000,000 in dividends?

Question

Quizplus · Accepted Answer

The total amount paid for the preferred stock is 10,000 shares x $110 per share = $1,100,000.
Since the preferred stock is cumulative, any unpaid dividends from prior years must be paid before any dividends are paid to common stockholders. 
The preferred stockholders are entitled to receive 5% of the par value of the stock ($100 per share) each year before any dividends are paid to common stockholders. Therefore, the preferred stockholders are entitled to receive $5 per share each year.
For three years, the total amount of dividends owed to the preferred stockholders is: 
100 shares x $5 per share x 3 years = $1,500
Since no dividends have been paid to preferred shareholders, they are entitled to receive the entire $1,500 in dividends for the three-year period. Therefore, a shareholder owning 100 shares will receive: 
100 shares x $5 per share x 3 years = $1,500 in dividends. 
Therefore, the correct answer is B) $1,500.

At the Beginning of 2007, Emily Corporation Issued 10,000 Shares