Paul Bunyan is the owner of noncumulative 8 percent preferred
stock in the Broadview Corporation, which had no earnings
or profits in 2016. In 2017, the corporation had large profits
and a surplus from which it might properly have declared dividends. However, the directors refused to do so, using the surplus instead to purchase goods necessary for the corporation’s
expanding business. The corporation earned a small profit in
2018. The directors at the end of 2018 declared a 10 percent
dividend on the common stock and an 8 percent dividend on
the preferred stock without paying preferred dividends for
2017.
a. Is Bunyan entitled to dividends for 2016? For 2017? Why
or why not?
b. Is Bunyan entitled to a dividend of 10 percent rather than
8 percent in 2018? Why or why not?