Question

At the beginning of 2018, Priest Dental Supplies had outstanding 4M shares of $100, par 8% cumulative, non-participating preferred stock and 20M shares of $1 par common stock. During 2018, Priest declared and paid cash dividends of $100M. No dividends had been declared or paid during 2017. On January 12, Priest issued a 5% common stock dividend when the quoted market price for the common stock was $20 per share. What amount of cash did Priest distribute to common shareholders.

Answer 1

After allocating the required $64 million of the declared $100 million cash dividends to the preferred shareholders due to the cumulative nature of their preferred stock, Priest Dental Supplies distributed the remaining $36 million in cash to the common shareholders.

Step-by-step explanation:

The original question asks about the amount of cash distributed to common shareholders by Priest Dental Supplies after it declared and paid cash dividends in 2018. First, we need to calculate the dividends for the preferred stock. There are 4 million shares of preferred stock with a par value of $100, and an 8% dividend rate. This means each preferred share gets $8 annually (8% of $100). For 4 million shares, this totals $32 million ($8 per share times 4 million shares).

Since no dividends were paid in 2017 and the preferred stock is cumulative, the 2018 dividend payment must also cover the 2017 dividends for preferred shareholders. This doubles the amount for preferred shareholders to $64 million due to the cumulative feature. With $100 million declared and $64 million allocated to preferred shareholders, there is $36 million left for common shareholders.

The 5% stock dividend issued on January 12 does not impact the cash dividend calculation, as it was issued in the form of additional shares, not cash. Therefore, the entirety of the remaining $36 million was distributed as cash to the common shareholders.