Question

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 noncumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018?a. $40,000 to preferred stockholders and $60,000 to common stockholders.b. $80,000 to preferred stockholders and $20,000 to common stockholders.c. $20,000 to preferred stockholders and $80,000 to common stockholders.d. $100,000 to preferred stockholders and $0 to common stockholders.

Answer 1

A. $40,000 to preferred stockholders and $60,000 to common stockholders.

Step-by-step explanation:

Given,

California Adventures issues 5,000 shares of 8% , $100 par value preferred stock

= 5,000 x $100 = $500,000.

As the preferred stockholders get fixed dividend, the company's preferred stockholders will get 8% cash dividend.

The preferred dividend should be = $500,000 x 0.08 = $40,000.

As preferred dividend is a non-cumulative, the company do not have to pay 2017 dividend to preferred stockholders. Therefore, preferred stockholders will get $40,000 in 2018.

And the common stockholders' will get = $(100,000 - 40,000) = $60,000.