California Adventures issues 5,000 shares of 8%,$100 par value preferred stock at the beginning of 2017.All remaining shares are common stock.The company was not able to pay dividends in 2017,but plans to pay dividends of $100,000 in 2018.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 2018?

Question

Quizplus · Accepted Answer

Since the preferred stock is cumulative and the company did not pay dividends in 2017, the preferred stockholders are owed dividends for both 2017 and 2018 before any dividends can be paid to common stockholders. The annual dividend per share for the preferred stock is 8% of the $100 par value, which is $8 per share. With 5,000 shares, the total annual dividend for preferred stockholders is $40,000. Since dividends were not paid in 2017, the preferred stockholders are owed $40,000 for 2017 and another $40,000 for 2018, totaling $80,000. This leaves $20,000 of the $100,000 dividend to be paid to common stockholders in 2018.

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