Question

Rachel's Designs has 1,600 shares of 6%, $50 par value cumulative preferred stock issued at the beginning of 2019. All remaining shares are common stock. Due to cash flow difficulties, the company was not able to pay dividends in 2019 or 2020. The company plans to pay total dividends of $16,000 in 2021. How much of the $16,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders

Answer 1

Preferred stock dividends to be paid = $14400

Common stock dividends to be paid = $1600

Step-by-step explanation:

The preferred stockholders have a claim on dividend before the common stockholders. The common stockholders are paid dividends from the residual amount after the payment to preferred stockholders has been made.

The cumulative preferred stock is the one that accumulates or accrues dividends in case the company is unable to pay or has partially paid the dividends on these preferred stock. The accrued dividends must be paid whenever the company declares dividends.

The total dividends per year on the cumulative preferred stock are:

Total preferred dividends per year = 1600 * 50 * 0.06 = $4800

The dividends that are accrued at the start of the year on these preferred stocks are = 4800 * 2 = $9600

The company will also pay $4800 to preferred stockholders for 2021 as dividends.

So, total payment to preferred stock holders will be = 9600 + 4800 = $14400

The residual or remaining amount will be payable to common stockholders out of the declared dividends.

Common stock dividends 2021 = 16000 - 14400 = $1600