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1 November, 18:40

Outstanding stock of the West Corporation included 40,000 shares of $5 par common stock and 10,000 shares of 5%, $10 par non-cumulative preferred stock. In year 1, West declared and paid dividends of $4,000. In year 2, West declared and paid dividends of $20,000. How much of the year 2 dividend was distributed to preferred shareholders?

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  1. 1 November, 20:17
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    Dividend paid = (5% * 10,000 * $10) = $5000.

    Explanation:

    Preference shares entitles the holders to participate in a fixed dividend out of the profit made by the company. The divide is always a fixed percentage of the nominal value of the preference shares

    It can be cumulative and non-accumulate.

    Cumulative simply implies that should the company misses the payment of dividend in a particular year such unpaid dividend would be carried carried forward and paid in arrears in the following year/

    Non-cumulative is the exact opposite of the case. Here, unpaid dividends are not paid in arrears in fact such are forfeited for life.

    Dividend in Year 1

    Dividend paid in Year 1 was $ 4000 but ought to be $5,000 (5% * 10,000 * $10). An arrear of $1000

    Dividend in Year 2

    Dividend paid = (5% * 10,000 * $10) = $5000.

    Note that the unpaid dividend of $1,000 in year 1 is lost forever
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