Question

Dechow Company has outstanding 20,000 shares of $50 par value, 6% cumulative preferred stock and 50,000 shares of $10 par value common stock. The company declares and pays cash dividends amounting to $160,000.

a. If there are no preferred dividends in arrears, how much in total dividends, and in dividends per share, does Dechow pay to each class of stock?
b. If there are one year’s dividends in arrears on preferred stock, how much in total dividends, and in dividends per share, does to each class of stock?

Answer 1

a. Dividends to Preferred shareholders:

Total dividends:

= 20,000 * 50 * 6%

= $60,000

Dividends per preferred share:

= 60,000 / 20,000 shares

= $3.00 per share

Common shareholder dividends

Common shareholders get the remaining dividends that did not go to Preferred shareholders:

= 160,000 - 60,000

= $100,000

Common dividends per share:

= 100,000 / 50,000 shares

= $2.00 per share

b. These are cumulative preferred shares which means that accrued dividends must be paid off:

Preferred shares in total would be:

= 60,000 * 2

= $120,000

Preferred dividends per share:

= 120,000 / 20,000

= $6.00 per share

Common dividends in total:

= 160,000 - 120,000

= $40,000

Common dividends per share:

= 40,000 / 50,000 shares

= $0.80 per share