Question

Alpha Corporation has 1,500 shares of $40 par, 7% cumulative preferred stock, and 2,200shares of 10$ par common stock.Alpha paid $10,000 in cash dividends including one- year dividends in arrears to preferred stockholders. Camon stockholders received:

Answer 1

Common stockholders received $1,600.

Explanation:

Cumulative preferred stock can be described as a type of preferred stock in which dividends not paid in any year accumulate and has to be paid first in future before common stockholders receive any dividends.

Since the dividends paid in cash by Alpha Corporation includes one- year dividends in arrears to preferred stockholders, this implies that the cumulative preferred stockholders have to paid 2-year dividends, i.e. the one-year arrears plus the current year dividend.

Amount received by common stockholders can be calculated as follows:

Amount of dividend paid by Alpha = $10,000

Annual cumulative preferred stock dividend = 1,500 * $40 * 7% = $4,200

Amount received by cumulative preferred stockholders = Annual cumulative preferred stock dividend * 2 years = $4,200 * 2 = $8,400

Amount received by common stockholders = Amount of dividend paid by Alpha - Amount received by cumulative preferred stockholders = $10,000 - $8,400 = $1,600

Therefore, common stockholders received $1,600.