Accounting for Dividends The stockholders’ equity sections of the balance sheets of Freemont Corporation and Tufler Corporation contained the following:

The preferred stock of Tufler has an 8 percent dividend rate and is cumulative with respect to dividends.

a. Both companies are considering forgoing dividends for the next 3 years to save cash for expansion. Will such a plan raise difficulties for either company? Explain why or why not.

b. If both companies pay a dividend of $70,000, why might the common shareholders of Tufler receive no dividend?

c. If Tufler pays a dividend of $70,000 each year, what portion of the dividend will go to the preferred shareholders?
To the common shareholders?

d. If preferred shareholders virtually always have a priority claim over common shareholders with respect to dividends, what is the advantage to common shareholders of having preferred stock outstanding?

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Freemont Tuffer Common stock, $10 par value Preferred stock. $25 par value Additional paid-in capital Retained earnings Total stockholders' equity $ 500,000 $ 200,000 600,000 300,000 400,000 400,000 $1,200,000 $1,200,000