Rachel’s Designs has 2,000 shares of 5%, $50 par value cumulative preferred stoc
ID: 2415184 • Letter: R
Question
Rachel’s Designs has 2,000 shares of 5%, $50 par value cumulative preferred stock issued at the beginning of 2013. All remaining shares are common stock. Due to cash flow difficulties, the company was not able to pay dividends in 2013 or 2014. The company plans to pay total dividends of $16,000 in 2015. How much of the $16,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders? preferred dividends for 2015? preferred dividends in arrears for 2013 and 2014? Remaining dividends to common stockholders?
Explanation / Answer
In case of cumulative prefered stock, if the company doesnot pay divident in any year, then the divident for that year gets cumulative and is paid in the next years
Total Dividend in 2015 = $ 16,000
Dividend on Prefered stock per year = 50*5% = 2.5 per stock, 2.5 * 2000 = $ 5,000
Dividend for 2013 = $ 5,000
Dividend for 2014 = $ 5,000
Dividend for 2015 = $ 5,000
Since the company does not pay any dividend in 2013 and 2014, now the company has to pay the dividend for these 2 years in the year 2015 since these are cumulative preferered stock
a) Total Dividend paid to preferred stockholders in 2015 = 5000+5000+5000= $ 15,000
b) Total Dividend paid to equity stockholders in 2015 = 16000 - 15000 = $ 1,000
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