Question

2) SSC has issued 100,000 shares of preferred shares. The preferred shares have a par value of $100 / share and a 5% dividend rate. a) If SSC declares a preferred stock cash dividend, how much cash will each share receive? b) If SSC has only $10,000 available for dividends, how much money will be paid to preferred shareholders, and how much will be paid to common shareholders? c) If SSC has $700,000 available to pay shareholder dividends, how much money will be paid to preferred shareholders, and how much will be paid to common shareholders? d) If the preferred shares are "cumulative preferred shares, and due to financial reasons SSC must skip a dividend and not pay preferred shareholders, what must happen before SSC is legally allowed to pay any dividends to common shareholders?

Answer 1

Solution a:

If SSC declares dividend, cash received by each preferred share = $100*6% = $6

Solution b:

Annual preferred dividend = 100000*$6 = $600,000

As SSC has only $10,000 available for dividends, therefore entire amount should be paid to preferred stockholders.

Amount to be paid to preferred stockholder = $10,000

Amount to be paid to common stockholders =0

Solution c:

If SSC has $700,000 available fro dividends:

Amount to be paid to preferred stockholder = $600,000

Amount to be paid to common stockholders = $100,000

Solution d:

Before SSC pay any dividend to common shareholders, it has to pay preferred shareholders all dividends including arrears.