Question

The shareholders’ equity of ilp industries includes the items shown below. the board of directors of ilp declared cash dividends of $14 million, $30 million, and $170 million in its first three years of operation—2024, 2025, and 2026, respectively. ($ in millions) common stock $ 120 paid-in capital—excess of par, common 1,000 preferred stock, 8% 300 paid-in capital—excess of par, preferred 575 required: determine the amount of dividends to be paid to preferred and common shareholders in each of the three years, assuming that the preferred stock is cumulative and nonparticipating. determine the amount of dividends to be paid to preferred and common shareholders in each of the three years, assuming that the preferred stock is noncumulative and nonparticipating.

Answer 1

To calculate dividends for preferred and common shareholders of ILP Industries, one must consider if the preferred stock is cumulative or noncumulative. Cumulative preferred stockholders receive all declared dividends and any unpaid amounts carried over before common shareholders get anything. For noncumulative preferred stock, unpaid dividends do not carry forward, and preferred shareholders only receive dividends if the declared amount is up to or exceeding their preference in a given year.

Step-by-step explanation:

Determining Dividends for Preferred and Common Shareholders

To determine the amount of dividends to be paid to preferred and common shareholders in the years 2024, 2025, and 2026, we first must understand that preferred stockholders get paid before common shareholders. The preferred stock mentioned has an 8% dividend rate and is $300 million in value, which means the annual dividends for preferred shareholders will be 8% of $300 million, or $24 million.

If the preferred stock is cumulative and nonparticipating, unpaid dividends from the past must be paid before common shareholders receive any dividends. In the first year (2024), all the $14 million declared would go to the preferred shareholders, with $10 million (the remainder of the full $24 million dividends) carried over to the next year. In 2025, the preferred shareholders would receive their full $24 million plus the $10 million carried over from 2024, with the remaining $6 million from the $30 million declared going to common shareholders. In 2026, the preferred shareholders would receive their full $24 million, and the common shareholders would receive the remaining $146 million of the $170 million declared.

If the preferred stock is noncumulative and nonparticipating, any unpaid dividends do not carry forward. Therefore, in 2024 and 2025, preferred shareholders would receive the full amount declared ($14 million and $30 million, respectively), as it is less than their annual $24 million preference. In 2026, preferred shareholders would receive $24 million, with common shareholders receiving the remaining $146 million.