Final answer:
The corporation must pay the cumulative unpaid dividends from the past two years to the preferred stockholders, calculated based on the fixed dividend rate agreed upon, before it can issue dividends to common stockholders.
Step-by-step explanation:
The question revolves around a corporation that has a 9% cumulative preferred stock issue outstanding and its implications for dividend payments. When a company pays dividends, it distributes part of its profits to shareholders, and the amount received by each shareholder is proportional to the number of shares owned. Given that the company paid a $7 dividend two years ago and $8 last year, the cumulative nature of the preferred stock implies that preferred shareholders are entitled to receive all unpaid past dividends before common stock dividends can be paid. In this case, if the company wishes to pay a common stock dividend this year, it must first cover any dividend shortfalls to the cumulative preferred shareholders.
Considering that preferred dividends are typically a fixed amount per share, we calculate the required dividend payment to preferred shareholders based on the stated dividend rate and any missed payments. The cumulative feature means that if preferred dividends were omitted or not fully paid in the past, they must be paid out before any dividends can be distributed to common stockholders. Therefore, to determine how much the corporation must pay its cumulative preferred stockholders before it can pay a common stock dividend, we must add up all unpaid dividends from previous years, alongside the current year's obligation.