Question

the mwf corporation has 40,000 shares of common stock issued and outstanding. it alsohas 5,000 shares of $100 par value preferred stock issued and outstanding that pays anannual 6 percent cumulative cash dividend. no cash dividends are declared or paid in yearone but an $80,000 cash dividend is declared and paid in year two. how much of this cashwill each share of common stock receive in year two?

Answer 1

In year two, after paying cumulative preferred dividends for two years ($60,000), each share of common stock of the MWF Corporation will receive $0.50 from the remaining $20,000 cash dividend.

Step-by-step explanation:

Dividend Distribution:

The MWF Corporation has issued shares of common and preferred stock. The preferred stockholders are entitled to their dividends before the common stockholders. Each share of preferred stock has a $100 par value and pays an annual 6 percent cumulative cash dividend. In year two, cash dividends totaling $80,000 are paid. The preferred shareholders must be paid their promised dividends before any remaining funds are distributed to the common shareholders.

First, we calculate the total dividends for preferred shareholders. With 5,000 shares at $100 par and a 6 percent dividend rate, we calculate $100 * 0.06 * 5,000 shares = $30,000 annual dividend for preferred stocks. Since no dividend was paid in year one and the preferred dividends are cumulative, the total dividends in arrears that need to be paid in year two are $30,000 for year one and $30,000 for year two, which adds up to $60,000. This amount is subtracted from the total $80,000 dividend declared in year two.