Question

Allison Company has 40,000 shares of $320 par value, 5% cumulative preferred stock and 140,000 shares of $80 par value common stock. Allison declares and pays cash dividends amounting to $900,000. If no arrearage on the preferred stock exists, how much in dividends per share (use two decimal places) is paid to the common stockholders

Answer 1

The dividends per share paid to common stockholders in Allison Company is approximately $1.86.

Step-by-step explanation:

The total amount of cash dividends paid by Allison Company is $900,000. To determine the dividends per share for common stockholders, we need to subtract the amount of cash dividends paid to preferred stockholders from the total dividends paid. The preferred stock has a par value of $320 and a cumulative dividend rate of 5%, which means that preferred stockholders are entitled to receive 5% of the par value per share before any dividends can be paid to common stockholders.

Since there is no arrearage on the preferred stock, all 40,000 preferred shares will receive the 5% cumulative dividend. The cumulative dividend for each preferred stock share is $16 (5% of $320). Therefore, the total amount of cash dividends paid to preferred stockholders is $640,000 (40,000 shares x $16).

The remaining amount of cash dividends, $900,000 - $640,000 = $260,000, is distributed to common stockholders. There are 140,000 common shares, so the dividends per share for common stockholders is approximately $1.86 ($260,000 / 140,000).

Answer 2

$1.86

Step-by-step explanation:

Preference shares get first preference when dividends are being paid. So, out of the dividend declared, we first payoff Preference dividends then the remainder goes to Common Stock holders.

Cash Dividend = $900,000

Preference Dividends

Preference Stockholders receive a fixed dividend calculated as :

Dividend = 40,000 shares x $320 x 5 % = $640,000

Dividend per share = $640,000 / 40,000 = $16.00

Common Stockholders Dividends

Remainder = $900,000 - $640,000 = $260,000

Dividend per share = $260,000 / 140,000 = $1.86

Conclusion :

Dividends per share paid to the common stockholders is $1.86