A firm has 1,000 shares of preferred stock with a par value of $100 and an 8% annual dividend. There are 5,000 shares of common stock outstanding. The preferred stock is non-cumulative. The board of directors passed the preferred dividend for the prior year. How much must the preferred stockholders be paid prior to paying dividends to common stockholders at the end of the third year?

1. Problem Description

A firm has 1,000 shares of preferred stock with a par value of $100 and an 8% annual dividend. There are 5,000 shares of common stock outstanding. The preferred stock is non-cumulative. The board of directors passed the preferred dividend for the prior year. How much must the preferred stockholders be paid prior to paying dividends to common stockholders at the end of the third year?

2. Solution Steps

First, calculate the annual dividend per share of preferred stock.

Annual dividend per share = Par value * Dividend rate

Annual dividend per share = $100 * 8$100 * 0.08 = $8

Next, calculate the total annual preferred dividend.

Total annual preferred dividend = Annual dividend per share * Number of shares

Total annual preferred dividend = $8 * 1,000 =$8,000

Since the preferred stock is non-cumulative and the preferred dividend was passed for the prior one year, the firm must pay the current year's dividend to preferred stockholders before paying dividends to common stockholders.

The question is asking how much must be paid to preferred shareholders *prior* to paying to common shareholders. Since the stock is non-cumulative, there is no need to pay the past year's dividend. Therefore, the firm only needs to pay the current year's dividend.

So, the amount to be paid is $8,

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3. Final Answer

c. $8,000