Question

Required information Use the following information for the Exercises below. (Algo) [The following information applies to the questions displayed below.] Exercise 11-11 (Algo) Dividends on common and noncumulative preferred stock LO C2 York's outstanding stock consists of 75,000 shares of noncumulative 6.0% preferred stock with a $5 par value and also 240,000 shares of common stock with a $1 par value. During its first four years of operation, the corporation declared and paid the following total cash dividends: Determine the amount of dividends paid each year to each of the two classes of stockholders: preferred and common. (Round your "Dividend per Preferred Share" answer to 3 decimal places.)

Answer 1

A company's dividends are part of its profits distributed to shareholders based on the number of shares owned. Preferred stockholders receive a fixed percentage of dividends before common shareholders. Calculations for specific dividend amounts to each class of shareholders depend on the total declared dividends and the par values and quantities of preferred and common stock.

Step-by-step explanation:

When a company decides to pay a dividend, it is allocating a portion of its profits to its shareholders, distributing the earnings based on the number of shares each shareholder owns. For noncumulative preferred stockholders, dividends are typically a fixed percentage of the par value of their shares and must be paid before common stockholders receive any dividends. However, if the dividends are not declared in any year, they do not accumulate for noncumulative preferred shareholders.

To calculate the dividends paid to each class of stockholders, we must first determine the total dividend amount allocated to the preferred stockholders, which is calculated as 6% of the par value ($5) times the number of preferred shares (75,000). After fulfilling the preferred stockholders' dividends, any remaining amount is then distributed to the common stockholders. If the total dividends declared for the year do not cover the preferred dividends, common stockholders will not receive any dividends.

If we were given specific total dividend amounts for each year, we could calculate the dividends paid to each type of shareholder. For example, if the total declared dividends were $100,000 in a year, the preferred shareholders would receive $22,500 (6% × $5 × 75,000), and the remaining $77,500 would be distributed among the common stockholders. Dividing this amount by the number of common shares (240,000) would give us the dividend per common share.