Question

Rachel's Designs has 1,900 shares of 6%, $50 par value cumulative preferred stock issued at the beginning of 2019. All remaining shares are common stock. Due to cash flow difficulties, the company was not able to pay dividends in 2019 or 2020. The company plans to pay total dividends of $19,000 in 2021. How much of the $19,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders

Answer 1

Preferred stockholders will receive $10,260 in dividends, which includes arrears for two years plus the current year's dividend. The remaining $8,740 will be paid to common stockholders after settling the preferred dividends.

Step-by-step explanation:

Rachel's Designs has outstanding cumulative preferred stock, which means dividends that were not paid in previous years must be paid out before any dividends can go to common stockholders. First, we must calculate the total dividends in arrears for the preferred stockholders: 1,900 shares at a 6% dividend rate on a $50 par value equals a $3,420 dividend per year.

For two years (2019 and 2020), the cumulative dividend is $6,840 (2 x $3,420). With $19,000 available for dividends in 2021, subtract the $6,840 arrears to find the remaining amount for distribution. The preferred stockholders will receive their $6,840 arrears, plus their 2021 dividend of $3,420, totaling $10,260. The remaining $8,740 ($19,000 - $10,260) is available for the common stockholders.

Answer 2

• Preferred Dividend = $17,100
• Common Dividend = $1,900

Step-by-step explanation:

Cumulative preferred stockholders will always have their dividends paid to them eventually because the dividends will accrue for years where they went unpaid.

This means that in 2021 they will be paid their dividends for the years 2019, 2020 and 2021.

Yearly preferred dividend = 1,900 * 6% * 50

= $5,700

Preferred dividends in 2021 = 5,700 * 3

= $17,100

Common stockholders would get = 19,000 - 17,100

= $1,900