An investor holds 1,000 shares of Apex Logistics Inc. 5% cumulative, non-participating pre… — FINRA SIE (Securities Industry Essentials)

An investor holds 1,000 shares of Apex Logistics Inc. 5% cumulative, non-participating preferred stock with a $100 par value. Apex Logistics suspended all dividend payments for the previous two consecutive years due to cash flow constraints. In the current year, the board of directors approves a dividend distribution. Before any dividend payout can be made to common stockholders, what total dollar amount in dividends must the investor receive?

$15,000Answer
B
$5,000
C
$10,000
D
$0

Answer

$15,000

Cumulative preferred stock entitles the holder to receive all accumulated unpaid dividends from past years (dividends in arrears) in addition to the current year's stated dividend before any dividends can be paid to common stockholders. For 1,000 shares with a

100 par value paying 5%, the annual dividend is

5,000. Paying two years of accumulated arrears (

10,000) plus the current year (

5,000) requires a total payout of $15,000.

Step-by-Step Solution

Calculate the annual dividend obligation per share and total annual preferred dividend requirement.

5% of

100 par value =

5 per share. For 1,000 shares, annual dividend = $5,000.

Establishes the mandatory base dividend amount per fiscal year.

Calculate total accumulated unpaid dividends in arrears for prior suspended years.

2 years in arrears ×

5,000 =

10,000.

Cumulative preferred shares require all skipped dividends to accumulate until paid.

Add the current year's preferred dividend requirement to total dividends in arrears.

10,000 (arrears) +

5,000 (current year) = $15,000 total.

All cumulative arrears plus the current period preferred dividend must be fully satisfied before any common dividend payment can occur.

Key Concept

Cumulative preferred stock dividend priority and calculation of arrears

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