Question

The outstanding capital stock of Bramble Corporation consists of 1, 900 shares of $100 par value, 8% preferred, and 4, 700 shares of $50 par value common.

Assuming that the company has retained earnings of $92,000, all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of stock should receive under each of the following conditions.
(a) The preferred stock is noncumulative and nonparticipating. (Round answers to o decimal places, e.g. $38, 487.)
(b) The preferred stock is cumulative and nonparticipating (Round answers to o decimal places, e.g. $38, 487.)
(c) The preferred stock is cumulative and participating. (Round the rate of participation to 4 decimal places, e.g.1.4278%. Round answers to o decimal places, e.g. $38, 487.)

Answer 1

Under each condition, the allocation of dividends to each class of stock is as follows: (a) Preferred stock: $15,200; Common stock: $76,800. (b) Preferred stock: $30,400; Common stock: $61,600. (c) Preferred stock: $769.98; Common stock: $76,030.02.

Step-by-step explanation:

To determine how much each class of stock should receive under each of the given conditions, we need to calculate the dividends for each class of stock.

(a) Preferred stock is noncumulative and nonparticipating:

The total preferred dividends = Preferred stock quantity x Preferred stock par value x Preferred stock dividend rate = 1900 x $100 x 8% = $15,200

The total common dividends = Retained earnings - Preferred dividends = $92,000 - $15,200 = $76,800

Each class of stock should receive:

Preferred stock: $15,200

Common stock: $76,800

(b) Preferred stock is cumulative and nonparticipating:

The preferred stock dividend is not paid for the 2 years preceding the current year, so the dividend for the current year is doubled.

The total preferred dividends = Preferred stock quantity x Preferred stock par value x Preferred stock dividend rate x 2 = 1900 x $100 x 8% x 2 = $30,400

The total common dividends = Retained earnings - Preferred dividends = $92,000 - $30,400 = $61,600

Each class of stock should receive:

Preferred stock: $30,400

Common stock: $61,600

(c) Preferred stock is cumulative and participating:

In this case, the preferred stockholders will receive their preferred dividends and also participate in the remaining common dividends.

The total preferred dividends = Preferred stock quantity x Preferred stock par value x Preferred stock dividend rate = 1900 x $100 x 8% = $15,200

The total common dividends available for participation = Retained earnings - Preferred dividends = $92,000 - $15,200 = $76,800

The rate of participation = Common dividends available for participation / (Preferred stock par value x Preferred stock quantity) = $76,800 / (1900 x $100) = 0.4042%

The total common dividends to be paid out to the preferred stockholders = Preferred stock par value x Preferred stock quantity x Rate of participation = $100 x 1900 x 0.4042% = $769.98

The remaining common dividends to be paid out to the common stockholders = Total common dividends available for participation - Total common dividends to be paid out to the preferred stockholders = $76,800 - $769.98 = $76,030.02

Each class of stock should receive:

Preferred stock: $769.98

Common stock: $76,030.02