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Laurel Designs has 1,400 shares of 7%, $50 par value cumulative preferred stock issued at the beginning of 2022. All remaining shares are common stock. Due to cash flow difficulties, the company was not able to pay dividends in 2022 or 2023. The company plans to pay total dividends of $16,000 in 2024. How much of the $16,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders?

Question

Laurel Designs has 1,400 shares of 7%, 50parvaluecumulativepreferredstockissuedatthebeginningof2022.Allremainingsharesarecommonstock.Duetocashflowdifficulties,thecompanywasnotabletopaydividendsin2022or2023.Thecompanyplanstopaytotaldividendsof50 par value cumulative preferred stock issued at the beginning of 2022. All remaining shares are common stock. Due to cash flow difficulties, the company was not able to pay dividends in 2022 or 2023. The company plans to pay total dividends of 16,000 in 2024. How much of the $16,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders?

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Solution

First, let's calculate the annual dividend for the preferred stock. The preferred stock has a 7% dividend rate and a 50parvalue.So,theannualdividendpershareis750 par value. So, the annual dividend per share is 7% of 50, which equals $3.5.

Since Laurel Designs has 1,400 shares of preferred stock, the total annual dividend for the preferred stock is 3.51,400=3.5 * 1,400 = 4,900.

Since the preferred stock is cumulative, any unpaid dividends will accumulate and must be paid in full before any dividends can be paid to common stockholders. Since the company did not pay dividends in 2022 or 2023, the unpaid dividends for the preferred stockholders total 4,9002=4,900 * 2 = 9,800.

In 2024, the company

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