Series 7 Exam Question 13: Answer and Explanation

Question: 13

DEF Corporation has previously issued 4% $100 par cumulative preferred stock. In the first two years, it paid $2 and $3 in dividends, respectively. If the company announces a common dividend in the following year, how much does it owe preferred stockholders?

• A. $3
• B. $4
• C. $5
• D. $7

Correct Answer: D

Explanation:

D. Because this is cumulative preferred stock, the corporation must make up any preferred dividends owed prior to paying dividends to common stockholders. In this case, they shorted the preferred shareholders $2 per share in the first year ($4 due [4% of $100 par value] and only $2 paid), $1 per share in the second year ($4 due and only $3 paid), plus the $4 due now.

$2 + $1 + $4 = $7