Question

The shareholders' equity of Chu Chen Company includes the items shown below. The board of directors of Chu Chen declared cash dividends of $4.6 million, $10.0 million, and $52.0 million in each of its first 3 years of operation: 2022, 2023, and 2024, respectively. Common stock, $1 par, 50,000,000 shares outstanding Preferred stock, 5%, $100 par, 1,000,000 shares outstanding Required: Determine the amount of dividends per share on preferred and common stock for each of the three

Answer 1

The amount of dividends per share on preferred stock is $5.00 each year. For common stock, it is -$0.08 in 2022 (meaning no dividend was paid), $0.10 in 2023, and $0.94 in 2024 after paying the preferred dividends.

Step-by-step explanation:

The question asks to calculate the amount of dividends per share on preferred and common stock for each of the first three years of Chu Chen Company's operation. Since the preferred stock is 5% and $100 par, for 1,000,000 shares, the total preferred dividend per year will be 5% of $100 million or $5 million annually. Subtracting this preferred dividend from the total declared dividend each year gives the amount available to common shareholders. Therefore, the dividends per share for preferred stock will be $5.00 per year (as it is a fixed percent), and the amount for common stock each year will vary based on the remaining dividends after preferred shareholders are paid.

Year 2022:

• Preferred Stock Dividends: $5.00 per share
• Common Stock Dividends: $(4.6 million - $5 million) / 50 million shares = -$0.08 per share (no actual dividend since the amount is negative)

Year 2023:

• Preferred Stock Dividends: $5.00 per share
• Common Stock Dividends: $(10.0 million - $5 million) / 50 million shares = $0.10 per share

Year 2024:

• Preferred Stock Dividends: $5.00 per share
• Common Stock Dividends: $(52.0 million - $5 million) / 50 million shares = $0.94 per share