Question

ABC Company has issued 10% cumulative preferred stock. Two years ago, ABC paid a 6% preferred dividend. Last year, ABC paid a 7% preferred dividend. This year, ABC wishes to pay a common dividend. The preferred shareholders must receive:

A. 0%
B. 7%
C. 10%
D. 17%

Answer 1

Option (d) is correct.

Step-by-step explanation:

Given that,

Company issued 10% cumulative preferred stock

As this is a case of cumulative preferred stock, so all of the missed dividend must be paid before the payment of common dividend.

Therefore,

Total preferred dividend to be paid:

= Dividend missed two years ago + Dividend missed last year + Preferred dividend this year

= (10% - 6%) + (10% - 7%) + 10%

= 4% + 3% + 10%

= 17%

Hence, the preferred shareholders must receive 17%.