RRR Corporation has $1,000,000 of no par cumulative preferred stock promising di
ID: 2477321 • Letter: R
Question
RRR Corporation has $1,000,000 of no par cumulative preferred stock promising dividends at 5%. they also have $1,000,000 of common stock (no par). They have not paid any dividends last year or so far this year. At the end of this year, the directors declare $120,000 total dividends to be paid out. How much of the dividends will be allowed to go to common stockholders?
Common shareholders can have $70,000 - the 5% or $50,000 must be paid to the preferred shareholders
Common shareholders can have $20,000 - the rest must go to the preferred shareholders
Common shareholders can have $60,000 - 1/2 of the dividends
Common shareholders can have all $120,000 if the board of directors declares it
Explanation / Answer
Answer: Common shareholders can have $20,000 - the rest must go to the preferred shareholders
The preferred shareholders will have the right to receive the dividend first. The rest of the dividend will be distributed to the common stockholders. As the preferred shares are cumulative, the preferred shareholders will receive dividends due to them in the last year as well as for the current year.
Dividend to be paid to the preferred shareholders = (5% of $1000000) x 2 = $100000
Total dividend declared = $120000
Therefore dividend to be distributed to the common stockholders = $120000 - $100000 = $20000
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