Question

A firm has issued cumulative preferred stock with a $100 par value and a 12 percent annual dividend. For the past two years, the board of directors has decided not to pay a dividend. At the end of the current year, how much must the preferred stockholders be paid prior to paying the common stockholders

Answer 1

Cumulative Preferred Dividend = $36

Step-by-step explanation:

Given:

Stock value = $100

Dividend payment rate = 12%

Type of share = Cumulative preferred stock

Computation of per year dividend:

Per year dividend = Stock value × Dividend payment rate

Per year dividend = $100 × 12%

Per year dividend = $12

Computation of unpaid dividend:

Total unpaid dividend for 2 years = Per year dividend × 2 year

Total unpaid dividend for 2 years = $12 × 2

Total unpaid dividend for 2 years = $24

Cumulative Preferred Dividend = Current Year Dividend + Total unpaid dividend for 2 years

Cumulative Preferred Dividend = $12 + $24

Cumulative Preferred Dividend = $36