(Learning Objective 4: Divide cash dividends between preferred and common stock) Sterling Garde, Inc., has 90,000 shares of $1.35 preferred stock outstanding in addition to its common stock. The $1.35 designation means that the preferred stockholders receive an annual cash dividend of $1.35 per share. In 2012, Sterling Garde declares an annual dividend of $500,000. The allocation to preferred and common stockholders is as follows:
Answer these questions about Sterling Garde’s cash dividends.
1. How much in dividends must Sterling Garde declare each year before the common stockholders receive any cash dividends for the year?
2. Suppose Sterling Garde, Inc., declares cash dividends of $550,000 for 2012. How much of the dividends goes to preferred? How much goes to common?
3. Is Sterling Garde’s preferred stock cumulative or noncumulative? How can you tell?
4. Sterling Garde, Inc., passed the preferred dividend in 2011 and 2012. Then in 2013, Sterling Garde declares cash dividends of $1,600,000. How much of the dividends goes to preferred? How much goes to common?