Baxter, Inc., has 25,000 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 2016, Baxter declares an annual dividend of $500,000. The allocation to preferred and common stockholders is
Preferred dividend (25,000 shares X $1.35 per share).....................$ 33,750
Common dividend (remainder: $500,000 - $33,750)........................466,250
Total dividend..................................................................$500,000
Answer these questions about Baxter's cash dividends.
1. How much in dividends must Baxter declare each year before the common stockholders receive any cash dividends for the year?
2. Suppose Baxter, Inc., declares cash dividends of $400,000 for 2016. How much of the dividends goes to preferred? How much goes to common?
3. Is Baxter's preferred stock cumulative or noncumulative? How can you tell?
4. Baxter, Inc., passed the preferred dividend in 2015 and 2016. Then in 2017, Baxter declares cash dividends of $1,300,000. How much of the dividends goes to preferred? How much goes to common?