Question

M. Sheridan Corporation has 16,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2020. No dividends were declared in 2018 or 2019. If M. Sheridan wants to pay $480,000 of dividends in 2020, what amount of dividends will common stockholders receive?

Answer 1

Common stock dividend = $96000

Step-by-step explanation:

The preffered stock is cumulative which means that if dividends are not paid on preferred sock in a particular year, they are carried forward and will be paid later whenever dividends are declared. First we pay the dividends to the preferred stock as the name suggests and then the remaining is paid to common stock holders.

The dividend for preferred stock holders is of 2018,2019,2020 combined i.e. 3 years.

preferred stock dividend = 16000 * 100 * 0.08 = 128000 per years

for 3 years = 128000 * 3 = 384000

Dividend to common stock holders = 480000 - 384000 = 96000