Question

Seaside Developments Inc. has $200,000 of no par value 4% cumulative preferred shares, and 12,000 shares of no par value common shares outstanding. In its first three years of operation, the company paid cash dividends as follows: Year 1: $8,000; Year 2: $18,000; and Year 3: $24,000. The amount of dividends received by the preferred shareholders in year 3 was:_______
a. $8,000
b. $12,000
c. $16,000
d. $20,000

Answer 1

Answer: a. $18,000

Explanation:

Cumulative Preferred Shares are shares where the company will always pay Preferred dividends and in years they cannot, they accrue it till a time when they can.

In the above question the dividends due to Preferred Shares are,

= 4% * 200,000

= $8,000

In Year 1, $8,000 were declared as dividends.

= 8,000 - 8,000

= 0

This means that the company does not owe preferred dividends from Year 1.

In Year 2, $18,000 was declared as dividends,

= 18,000 - 8,000

= $8,000

This means that in Year 2, the company was able to pay off Preferred dividends and still have some left to pay off Common Shareholders.

In Year 3, $24,000 was declared as dividends.

= 24,000 - 8,000

= $16,000

In year 3 as well, tue company had enough to pay off it's Preferred Dividend obligations meaning that it paid off all of it.

In Year 3 therefore, Preferred Shareholders got the entire $8,000 that was due to them.