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Arevalos, Incorporated, has cumulative preferred stock outstanding that calls for quarterly dividend payments of $2.25 per share. Unfortunately, the firm has not paid these preferred dividends for the past three quarters. What amount per share must be paid to the preferred shareholders this quarter if the firm also wants to pay a dividend on its common stock?

Question

Arevalos, Incorporated, has cumulative preferred stock outstanding that calls for quarterly dividend payments of $2.25 per share. Unfortunately, the firm has not paid these preferred dividends for the past three quarters. What amount per share must be paid to the preferred shareholders this quarter if the firm also wants to pay a dividend on its common stock?

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Solution

Arevalos, Incorporated, must pay 2.25pershareforeachofthepastthreequarters,whichtotals2.25 per share for each of the past three quarters, which totals 6.75 per share (2.25x3).Inadditiontothis,theymustalsopaythecurrentquartersdividendof2.25 x 3). In addition to this, they must also pay the current quarter's dividend of 2.25. Therefore, the total amount that must be paid to the preferred shareholders this quarter is 9.00pershare(9.00 per share (6.75 + $2.25). Only after paying this amount can the firm consider paying a dividend on its common stock.

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