Encore inc. declared an $80,000 cash dividend. it currently has 3,000 shares of 7%, $100 par value cumulative preferred stock outstanding. it is one year in arrears on its preferred stock. how much cash dividends will encore distribute to the common stockholders?

$38,000

Explanation:

Before distributing dividends to common stockholders, Encore must first deal with the preferred stockholders.

preferred stock annual payment = 3,000 shares x 7% x $100 = $21,000

Since the company owes one year's payment to preferred stockholders, it must pay them two years now = $21,000 x 2 = $42,000

So Encore will have $38,000 (= $80,000 - $42,000) left to distribute to commons stockholders.

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