Question

Rachel’s Designs has 1,100 shares of 7%, $50 par value cumulative preferred stock issued at the beginning of 2016. All remaining shares are common stock. Due to cash flow difficulties, the company was not able to pay dividends in 2016 or 2017. The company plans to pay total dividends of $13,000 in 2018. How much of the $13,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders?

Answer 1

$11,550 and $1,450

Step-by-step explanation:

For computing the preferred dividend, first we have to find out the yearly dividend which is shown below:

= Number of shares × par value per share × dividend rate

= 1,100 shares × $50 × 7%

= $3,850

The dividend arrears for 2016 and 2017 would be

= $3,850 + $3,850

= $7,700

Total dividend paid to preference stockholders would be

= $3,850 + $7,700

= $11,550

Out of $13,000, the $11,550 will be paid to preference stockholders and the remaining $1,450 will be paid to equity stockholders