Q 14.6: Morris Enterprises has 5,000 shares of 5.5%, $100 par value cumulative preferred stock and 100,000 shares of $10 par value common stock. In 2018, Morris paid the preferred dividend and $25,000 in dividends to common stockholders. In 2019, Morris paid no cash dividends to stockholders. In 2020, Morris has declared a cash dividend totaling $75,000. How much in cash dividends will common stockholders receive in 2020

Dividend paid to be paid to common  stockholder=$ 20,000

Explanation:

Common stock holders are the real risk bearers as they receive as dividends the residual amount after all other claims have been settled.

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

Cumulative preference shares: 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/  

Preference dividends

2019 - 5.5% × $100 × 5,000=            $27500

2020 - 5.5% × $100 × 5,000 =            $27500

Total preferred to be paid in 2020 = 55,000

Dividends paid to common stock = Total dividend for 2020- Total preference dividend in 2020

Dividend paid to be paid to common  stockholder

= 75,000-55,000= 20,000

Dividend paid to be paid to common  stockholder=$ 20,000

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