Question

Robinson Company has 6,000 shares of 2%, $150 par, cumulative preferred stock outstanding. Robinson did not pay dividends during 2015, 2016, or 2017, but had met its preferred dividend requirements in all prior years. Robinson Company has been profitable in 2018 and is considering a cash dividend on its common stock that would be payable in December 2018. What amount of preferred dividends would have to be paid before a cash dividend could be paid to the common stockholders?

Answer 1

The amount of preferred dividends that will be paid is $72000.

Step-by-step explanation:

The cumulative preference shares are the shares that accumulate the dividends in case the dividend on the preferred shares is not paid in a particular year. Thus the 2015, 2016 and 2017 dividends will be accumulated and will be paid whenever dividend will be paid by the company.

Thus, the company will pay dividends for 2015 to 2018 i.e. 4 years before paying ordinary dividend.

The amount of preferred dividend per year is:

Preferred dividend per year = 6000 * 150 * 0.02 = 18000

The dividend will be paid for 4 years before paying common stock dividend. The total amount of dividend that needs to be paid is:

18000 * 4 = $72000