Practice question: Cumulative stock dividend pmt

Hi…I can’t seem to understand this answer…
Here’s the practice question:

The 4.00% pref.stock pays $2.00 per share in annual dividends. I’m confused around the explanation of the “One year ago…the dividend was partially paid at 0.75%.” It says the investor is still due 3.25% due to the missed dividend payment, which they’ll receive $568.75 for that year. My question is…why the payment due is 3.25%? I thought that since it’s $2.00 per share …then it should be 1.25% due (2 - 0.75 partially paid)?

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Hi @LASHY1980!

It sounds like the trouble you’re running into is the difference between the dividend rate and the dividend payment. The preferred stock pays a 4% dividend rate, but that’s based upon the $50 par value. 4% of $50 is $2.00.

If the issuer made a 0.75% payment a year ago, that means they’re missing 3.25% of the 4% dividend rate. The 0.75% is not subtracted from the $2.00, it’s subtracted from the 4% dividend rate.

I’m happy to go more in depth on this, so please let me know if you’re still confused.

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Oh I see. LOL

Thanks for the clarification…that helps!

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