Question

Dedrick, Inc., did not pay dividends in 2015 or 2016, even though 70,000 shares of its 8.5%, $50 par value cumulative preferred stock were outstanding during those years. The company has 500,000 shares of $2 par value common stock outstanding. Required:

a. Calculate the annual dividend per share obligation on the preferred stock. (Round your answer to 2 decimal places.)

b. Calculate the amount that would be received by an investor who has owned 1,400 shares of preferred stock and 16,000 shares of common stock since 2014 if a $0.60 per share dividend on to the common stock is paid at the end of 2017.

Answer 1

a) each year 4.25 dollars

dividends in arrears 9.50 dollars

b) the investor received $ 28,850

Step-by-step explanation:

dividends per year of preferred stock

70,000 shares x $50 each x 8.5% = 297,500 dollar per year

per share: 4.25 dollars

As the preferred stock accumualted 2 years in arrears:

297,500 x 2 = 595,000

per share: 595,000 / 70,000 = 9.50

b) to pay dividends to common stock first the firm should pay the preferred stocks thus; it received:

from preferrred stock:

1,400 x (9.50 arrears dividends + 4.25 current year dividends) = 19,250

from common stock:

16,000 x 0.60 = 9,600

In total it received 28,850