Qamar, Inc., did not pay dividends in 2012 or 2013, even though 50,000 shares of
ID: 2503296 • Letter: Q
Question
Qamar, Inc., did not pay dividends in 2012 or 2013, even though 50,000 shares of its 7.5%, $50 par value cumulative preferred stock were outstanding during those years. The company has 600,000 shares of $2 par value common stock outstanding.
Qamar, Inc., did not pay dividends in 2012 or 2013, even though 50,000 shares of its 7.5%, $50 par value cumulative preferred stock were outstanding during those years. The company has 600,000 shares of $2 par value common stock outstanding.
Calculate the amount that would be received by an investor who has owned 700 shares of preferred stock and 8,000 shares of common stock since 2011 if a $0.40 per share dividend on the common stock is paid at the end of 2014.Explanation / Answer
a. To calculate the annual dividend per share obligation on preferred stock, all you have to do is multiply the dividend rate (7.5%) by the par value ($50) and the multiply it by the number of preferred shares outstanding to get the total annual obligation the company has for all of its preferred stock. In this case,
.075 x $50 = $3.75
Qamar, Inc. owes $3.75 per preferred share in dividends each year.
$3.75 x 50,000 (preferred shares) = $187,500.
So, Qamar, Inc. owes $187,500 in dividends on preferred stock every year at the current par value and dividend rate. This question asks what the annual obligation is, so we don't need to multiply this number by the number of years they haven't paid. If they asked how much Qamar currently owed, we would mulitply $187,500 by 2 because they missed payments during the 2 years of 2012 and 2013.
b. Alright, so we'll walk through this one step by step.
The investor owned 700 shares of preferred stock since 2011, so they are owed the years Qamar missed (2012 and 2013) PLUS they will be owed dividends on their preferred stock for 2014 if the company wants to pay out dividends on its common stock (as preferred stock dividends always take priority and legally must be paid out first).
So, 700 shares x $3.75 dividends per share = $2,625 (this is for one year)
$2,625 x 3 years (2012, 2013, and 2014) = $7,875
That solves how much they would be paid on their preferred stock. However, the problem also says that the company will be paying a 40 cent dividend on their common stock, of which this investor is also an owner. So:
8,000 shares x $.40 per share = $3,200
Because common stock is not required to have dividends and the problem only says that they are paying the dividend on common stock in 2014, we stop there because as far as we know this is a one time dividend.
Now add everything together and you get
$7,875 (from preferred) + $3,200 (from common) = $11,075 total received by the investor in 2014.