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28 February, 08:48

Rachel's Designs has 1,800 shares of 5%, $50 par value cumulative preferred stock issued at the beginning of 2019. All remaining shares are common stock. Due to cash flow difficulties, the company was not able to pay dividends in 2019 or 2020. The company plans to pay total dividends of $15,000 in 2021. How much of the $15,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders?

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  1. 28 February, 08:54
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    Out of $15,000, the $13500 will be paid to preference stockholders and the remaining $1500 will be paid to equity stockholders

    Explanation:

    Given the information:

    Rachel's Designs has 1,800 shares of 5%, $50 par value

    The company plans to pay total dividends of $15,000 in 2021

    For computing the preferred dividend, first we have to find out the yearly dividend which is shown below:

    = Number of shares * par value per share * dividend rate

    = 1,800*$50*5%

    = $4,500

    Since in 2019 and 2020 the dividend is not paid

    The dividend arrears for 2019 and 2020 would be:

    = $4,500 + $4,500

    = $9000

    => The total dividend is:

    = $4,500 + $9000

    = $13,500

    So, for the common stockholder, it is

    = $15,000 - $13,500

    = $1500

    Hence, out of $15,000, the $13500 will be paid to preference stockholders and the remaining $1500 will be paid to equity stockholders
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