SIE Exam Question 411: Answer and Explanation

Question: 411

An NYSE listed corporation has outstanding preferred stock with a cumulative provision and a $5.00 annual dividend. If the earnings over the past two years have led to the Board of Directors declaring a $3.00 preferred dividend two years ago and a $2.00 dividend last year, in order that a common dividend may be paid for the current year:

• A. Dividends in arrears of $5.00 must be paid to the preferred
• B. Preferred stockholders must be paid $10 per share
• C. Preferred stockholders need to be paid their current $ 5.00 dividend
• D. None of the above is accurate.

Correct Answer: B

Explanation:

B: Not only do the past unpaid dividends have to be brought current, but the current year's dividend must also be paid. Common stock cannot get any dividend payment until the cumulative preferred has been brought completely current. Therefore, a total of $5 is past due covering the shortfall in the prior 2 years, and $5 is due for the current year: $10 must be paid to get current.