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Honeywell issued preferred shares with a fixed annual dividend payment of $2.50. Honeywell has not paid dividends for the past three years but plans to this year. How much will each preferred shareholder receive before common stockholders are provided dividends?

Answer :

Final answer:

Given that Honeywell didn't pay dividends for three years and now plans to do so, each preferred shareholder should receive $7.50 in backlogged dividends before any payments are made to common stockholders.

Explanation:

Honeywell's preferred shareholders will receive their backlogged dividends before any dividends are paid to common stockholders. According to the terms specified, each preferred shareholder should receive an annual fixed dividend of $2.50. Given that dividends have not been paid for three years, each preferred shareholder should expect to receive $7.50 ($2.50 times 3 years) before any dividends are distributed to other stock categories.

This is due to the nature of preferred shares, which typically have a fixed dividend that must be paid before dividends can be distributed to common shareholders. The organization's choice to issue preferred shares is tied to the owner’s expectations for returns, which can come in the form of dividends or capital gains. In cases where a company, like Honeywell, has missed dividend payments, these dividends are often accrued and paid out at a later date before any dividends are given to common shareholders.

This followed distribution preference is commonly part of a company's corporate dividend policy and is typical in the business world. It ensures that preferred shareholders receive their expected return in the form of a dividend, as they are usually not entitled to capital gains like common shareholders.

Learn more about Dividends and Preferred Shares here:

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