Question

Ozark Distributing Company is primarily engaged in the wholesale distribution of consumer products in the Ozark Mountain regions. The following disclosure note appeared in the company's 2016 annual report: Note 5. Convertible Preferred Stock (in part): The Company has the following Convertible Preferred Stock outstanding as of September 2016:

Date of issuance June 17 2013
Optionally redeemable beginning June 18, 2015
Par value (gross proceeds) $2,200,000
Number of shares 110,000
Liquidation preference per share $20
Conversion price per share $24.22
Number of common shares in which to be converted 90,834
Dividend rate 6.675%
The Preferred Stock is convertible at any time by the holders into a number of shares of Ozark's common stock equal to the number of preferred shares being converted times a fraction equal to $20 divided by the conversion price. The conversion prices for the Preferred Stock are subject to customary adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock. Cumulative dividends for the Preferred Stock are payable in arrears, when, as and if declared by the Board of Directors, on March 31, June 30, September 30, and December 31 of each year.

The Preferred Stock is optionally redeemable by the Company beginning on various dates, as listed above, at redemption prices equal to 110% of the liquidation preference. The redemption prices decrease 1% annually thereafter until the redemption price equals the liquidation preference after which date it remains the liquidation preference

What amount of dividends is paid annually to a preferred shareholder owning 200 shares of the Series A preferred stock?

Answer 1

A preferred shareholder owning 200 shares of the Series A preferred stock would receive $267 in annual dividends, calculated using the 6.675% dividend rate on the $20 liquidation preference per share.

Step-by-step explanation:

To calculate the annual dividends paid to a preferred shareholder owning 200 shares of the Series A preferred stock, we use the dividend rate given for the preferred stock. The note disclosure from the financial statement indicates that preferred shareholders are entitled to a dividend rate of 6.675%. Applying the dividend rate to the liquidation preference per share of $20, we can calculate the annual dividend per share:

Annual Dividend per Share = Liquidation Preference × Dividend Rate = $20 × 6.675% = $1.335 per share.

To find the total annual dividend for 200 shares, multiply the annual dividend per share by the number of shares:

Total Annual Dividend = Annual Dividend per Share × Number of Shares = $1.335 × 200 = $267.

Therefore, a preferred shareholder with 200 shares would receive $267 in dividends annually, assuming the board of directors declares the dividend as scheduled.