Company has 200000 of 5 cumulative preferred stock outstandi

Company has $200,000 of 5% cumulative, preferred stock outstanding, and $150,000 of common stock outstanding. In the company\'s first year of operation, no dividends were paid, but during the second year, it paid cash dividends of $25,000. Compute the dividends to be distributed to (1) preferred shares and (2) common shares.

Solution

Since preference shares are cumulative, dividend shall be paid for both second year as well as for first year of operation.

Total Dividend paid = $25000

Dividend to Preference Shareholders = 200000 * 5% * 2 = $20000

Dividend to Common Stock Shareholders = $25000 - $20000 = $5000

Therefore,

(1) Dividend to Preference Shareholders = $20000

(2) Dividend to Common Stock Shareholders = $5000