Question

Encore Inc. declared an $80,000 cash dividend. It currently has 3,000 shares of 7%, $100 par value cumulative preferred stock outstanding. It is one year in arrears on its preferred stock. How much cash dividends will Encore distribute to the common stockholders?

Answer 1

$38,000

Step-by-step explanation:

Before distributing dividends to common stockholders, Encore must first deal with the preferred stockholders.

preferred stock annual payment = 3,000 shares x 7% x $100 = $21,000

Since the company owes one year's payment to preferred stockholders, it must pay them two years now = $21,000 x 2 = $42,000

So Encore will have $38,000 (= $80,000 - $42,000) left to distribute to commons stockholders.