Company A pays a dividend of \$2 per share on its preferred stock. If the preferred stock is cumulative and the company missed last year's dividend payment, how much must the company pay per preferred share before any dividends can be paid to common shareholders?

• A. \$1
• B. \$0
• C. \$2
• D. \$4

Answer: (D)

Verified step by step guidance

1. Understand the concept of cumulative preferred stock: Cumulative preferred stock means that if a company misses a dividend payment in any year, the unpaid dividends accumulate and must be paid in full before any dividends can be paid to common shareholders.
2. Identify the dividend amount per share: The company pays \$2 per share as a dividend on its preferred stock.
3. Determine the missed dividend: Since the company missed last year's dividend payment, the \$2 per share from the previous year is still owed to the preferred shareholders.
4. Add the current year's dividend: The company must also pay the \$2 per share dividend for the current year, as preferred shareholders are entitled to their annual dividend.
5. Calculate the total amount owed per preferred share: Add the missed dividend from last year (\$2) to the current year's dividend (\$2), resulting in a total of \$4 per preferred share that must be paid before any dividends can be distributed to common shareholders.