Question

Tamarisk, Inc. has 10,600 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2022. No dividends were declared in 2020 or 2021. If Tamarisk wants to pay $400,000 of dividends in 2022, what amount of dividends will common stockholders receive?

Answer 1

Common stockholders will receive $92,000 of the $400,000 in total dividends after preferred stockholders are paid both the overdue and current dividends for 2022.

Step-by-step explanation:

Common stockholders will receive $92,000 in dividends for 2022 after preferred stockholders are paid their cumulative dividends.

Here's the breakdown: Preferred stock dividends are calculated first, with each share yielding 8% of its $100 par value annually, which is $8 per share. Multiplied by 10,600 shares, the total dividend for preferred stock is $84,800 annually. Since no dividends were paid in 2020 or 2021, the cumulative unpaid dividends amount to $169,600 (2 years * $84,800). Cumulative dividends must be paid out before common stockholders receive any dividends. With $400,000 available for dividends, subtracting the overdue preferred dividends yields $230,400 ($400,000 - $169,600). However, preferred stockholders are also entitled to their current year's dividend, which is another $84,800. Subtracting this from the remaining amount leaves $145,600 ($230,400 - $84,800). Finally, this remaining amount will be distributed to common stockholders.