Assume the following capital structure: Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for three prior years (2011-2013).
Common stock, $100 par value, 2,000 shares issued and outstanding.
Total dividends declared and paid in 2014 were $50,000. How much of the 2014 dividend will be paid to the preferred stockholders assuming the preferred stock is noncumulative?
A) $12,000.
B) $3,000.
C)$47,000.
D)$38,000.

Question

Quizplus · Accepted Answer

The preferred stock is noncumulative, which means that the dividends in arrears for the prior three years do not need to be paid before any dividends can be paid to the common stockholders. Therefore, the preferred stockholders are only entitled to their current year dividend of 6% on their $50 par value, which comes out to $3 per share ($50 par value x 6% dividend rate). 
The total preferred stock dividend payout for the year is $3 per share x 1,000 shares = $3,000. The remaining $47,000 ($50,000 total dividend - $3,000 preferred stock dividend) will be paid to the common stockholders.

Assume the Following Capital Structure: Preferred Stock, 6%, $50 Par