Question

A company has outstanding 12.00 million shares of $5.00 par common stock and 2.4 million shares of $5.40 par preferred stock. The preferred stock has an 12% dividend rate. The company declares $440,000 in total dividends for the year. Which of the following is correct if the preferred stockholders only have a current dividend preference?Preferred stockholders will receive the entire $480,000, and they must also be paid $80,000 before the end of the current accounting period. Common stockholders will receive nothing.

Preferred stockholders will receive the entire $480,000, and they must also be paid $80,000 sometime in the future before common stockholders will receive anything.

Preferred stockholders will receive $38,400 or 8% of the total dividends. Common stockholders will receive the remaining $441,600.

Preferred stockholders will receive the entire $480,000, but will receive nothing more relating to this dividend declaration. Common stockholders will receive nothing.

Answer 1

Answer: Preferred stockholders will receive the entire $480,000, but will receive nothing more relating to this dividend declaration. Common stockholders will receive nothing.

Step-by-step explanation:

Preferred Stockholders are entitled to the following dividend.

= 2 400 000 shares * $5.4 * 12%

= $1,555,200

They are entitled to $1,555,200 of dividends but since the dividends declared do not amount to that figure they will take the entire dividends declared.

However, because the preferred stockholders only have a current dividend preference meaning they are not cumulative, they can't claim the rest of the balance any other year. This is what they receive in terms of this dividend declaration.

Seeing as they take everything, the common shareholders get nothing this year.

Note; There is a discrepancy between the $440,000 in dividends declared in the question and the $480,000 in dividends declared in the options.