Question

A customer buys 1,000 shares of ABCD $25 par 8% cumulative preferred stock. This preferred issue pays quarterly dividends. This year, it missed the first 3 quarterly dividends. In the 4th quarter, it paid a common dividend of $.25 per share. In order to do this, it must have paid this preferred shareholder: A $400 B $500 C $1,600 D $2,000

Answer 1

Answer:

D $2,000

Explanation:

Valueof Preffered stock = 1000 x 25 = $25,000

Quartely dividend = 25000 x  8% x 3/12 = $500

Dividend of four quarters = $500 x  4 = $2,000

First three quarters has been missed so the preferred dividend of $2,000must be paid first from the declared dividend of 0.25 per share.

So, the correct option is D $2,000.

Answer 2

The amount of preferred dividend paid to shareholders for the missing periods is $2,000.

The dividend for the preference shareholders is the necessarily to be paid at the need of each period. It is the amount paid in return of the investment in the shares of the company.

Calculation:

Given,

Dividend rate =8%

Value of preferred shares =1,000 shares of $25 each, that is $25,000

Rate of dividend paid in 4th quarter =$0.25per share

First the quarterly dividend is computed for the preferred shares:

$\begin{aligned}\text{Quarterly Dividend}&=\text{Value of Preferred Shares}\times\text{Dividend Rate}\times\text{Missed Payments}\\&=\ 25,000\times8\%\times\frac{3}{12}\\&=\ 500\end{aligned}$

Now, the total amount of dividend missed for the payment is:

$\begin{aligned}\text{Dividend of Four Quarters}&=\text{Quarterly Dividend}\times4\\&=\ 500\times4\\&=\ 2,000\end{aligned}$

Thus, the amount paid to preferred shareholders is $2,000, so option D.is correct.

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