Rick Company has declared a $40,000 cash dividend to shareholders. The company has 5,000 shares of $20 par, 6% preferred stock, and 10,000 shares of $15 par common stock. The preferred stock is cumulative. How much will be distributed to the preferred and common stockholders on the date ofpayment if the preferred stock is $12,000 in arrears?

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At the time of payment, preferred stockholders can receive up to $42,000 ($40,000 + $22,000) while common stockholders are eligible for an additional $38,000 ($40,000-$2,000). Prefer stock, which is cumulative, has priority in the receiving of dividends. The company has to pay arrearages for preferred dividends before the remainder of them can be paid to common shareholders.

In this case, since there is an arrearage of $12 000 for the 5 000 shares of 6% preferred stock outstanding; then this amount needs to be paid first – resulting in a total payout of $52 000 (5 000 x 12). After payment has been made to preferred shareholders; then remaining funds can be allocated towards paying out dividend to those with common stocks – resulting in a distribution of 38 000 (10 000 x 3.8 ) on top of what they have already received.

In conclusion, understanding how different classes of stocks interact when it comes to dividend payments can help investors make more informed decisions regarding their portfolios – allowing them identify potential opportunities while also minimizing any potential risks associated with such investments.

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