Rachel’s Designs has 1,500 shares of 6%, $50 par value cumulative preferred stock issued at the beginning of 2016. All remaining shares are common stock. Due to cash flow difficulties, the company was not able to pay dividends in 2016 or 2017. The company plans to pay total dividends of $16,000 in 2018. How much of the $16,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders?

It is worth noting that preferred shares are so called because they enjoy preferential treatment when dividend is being distributed. The dividend for these shares must be distributed first before those of the ordinary or equity shares. Any dividends not paid in a given year is said to be in arrears and must be distributed when funds are available.

Therefore, Rachel's Designs owes dividends to preferred shareholders for the years 2016, 2017, and 2018.

Annual dividends to preferred shareholders

= No. of shares * Dividend rate * Par value of the share

= 1,500 * 6 % * 50

= 1,500 * 0.06 * 50 = $4,500

Amount of dividend owed to preferred shareholders

= Annual dividend * No. of years dividend is unpaid

= $4,500 * 3 = $13,500

Dividend for Common stockholders = $16,000 - $13,500

= $2,500