Question

kuhns corp. has 200,000 shares of preferred stock outstanding that is cumulative. the dividend is $6.50 per share and has not been paid for 3 years. if kuhns retained earnings and after-tax income this year total $3 million, what could be the maximum payment to the preferred shareholders on a per share basis? multiple choice $19.50 per share $15.00 per share $13.00 per share $6.50 per share

Answer 1

The maximum payment Kuhns Corp. can make to preferred shareholders is $15.00 per share, which utilizes the entire $3 million of available earnings to cover part of the dividends in arrears for the 200,000 shares.

Step-by-step explanation:

The question concerns Kuhns Corp., which has 200,000 shares of cumulative preferred stock outstanding, with a dividend of $6.50 per share that has been unpaid for three years. If Kuhns Corp. has retained earnings and after-tax income this year totaling $3 million, the maximum payment to the preferred shareholders on a per share basis would be calculated by first determining the total dividends in arrears, then checking if the available profits can cover these arrears.

The dividends in arrears are 3 years x $6.50 per share x 200,000 shares, which totals $3.9 million. However, since the total available is $3 million, the company cannot pay the total dividend in arrears. The maximum they can pay is based on the available $3 million, which all goes to the preferred shareholders. Thus, each share can receive a maximum of $3 million / 200,000 shares = $15.00 per share.