A company has outstanding 10 million shares of $2 par common shares and 1 million shares of $4 par preferred shares.The preferred shares have $0.32 dividend per share.The company declares $300,000 in total dividends for the year.Which of the following is true if the preferred shareholders have a current and cumulative dividend preference?

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Quizplus · Accepted Answer

Preferred shareholders have a current and cumulative dividend preference, which means they must be paid their full dividend before any dividends can be paid to common shareholders. In this case, the preferred shareholders are entitled to $0.32 per share, which amounts to $320,000 (1,000,000 shares x $0.32 per share). Since the company has only declared $300,000 in dividends, the preferred shareholders will receive the entire amount, and the common shareholders will receive nothing. However, the preferred shareholders are also entitled to the remaining $20,000 in dividends that were not paid this year. This amount will be carried forward to future years and must be paid to the preferred shareholders before any dividends can be paid to common shareholders.

A Company Has Outstanding 10 Million Shares of $2 Par