Question

Bill \& Lisa Limited did not pay dividends on its 6.5%, $100 par value cumulative preferred stock during 2021 or 2022. 5ince 2015, 275,000 shares of this stock have been outstanding. Bili \& Lisa Limited has been profitable in 2023 and is considering a cash dividend on its common stock that would be payable in December 2023.

Calculate the amount of dividends that would have to be paid on the preferred stock before a cash dividend could be paid to the common stockholders.

Answer 1

To pay a cash dividend to common stockholders, $1,787,500 in dividends must be paid on the preferred stock.

Step-by-step explanation:

To calculate the amount of dividends that would have to be paid on the preferred stock before a cash dividend can be paid to the common stockholders, we need to determine the accumulated unpaid dividends on the preferred stock. The cumulative preferred stock has a 6.5% annual dividend rate and a $100 par value. To find the accumulated unpaid dividends, multiply the annual dividend rate by the par value and then multiply that by the number of outstanding shares. In this case, the calculation would be: 6.5% x $100 x 275,000 shares = $1,787,500. Therefore, before a cash dividend can be paid to the common stockholders, $1,787,500 in dividends would have to be paid on the preferred stock.