Question

Nottebart Corporation has outstanding 10,000 shares of $100 par value, 6% preferred stock and 60,000 shares of $10 par value common stock. The preferred stock was issued in January 2017, and no dividends were declared in 2017 or 2018.In 2019, Nottebart declares a cash dividend of $300,000. How will the dividend be shared by common and preferred stockholders if the preferred is (a) noncumulative and (b) cumulative?

Answer 1

a. If the preferred stock is non-cumulative, the dividend to the preferred stockholders is $60,000, and to common stockholders is $240,000.

b. If the preferred stock is cumulative, the dividend to the preferred stockholders is $180,000, and to common stockholders is $120,000.

How to solve for the cumulative and non cumulative stock

a.

10000 * 100 * 0.06

= 60000 dollars

Cash dividend = 300000 dollars

300000 - 60000

= 240000 dollars

The dividend to preferred stockholders is $60,000 and to common stockholders is $240,000.

b. Diviident to preferred stakeholder

= 10000 * 100 * 0.06 * 3

= 180000

300000 - 180000

= 120000

The dividend to preferred stockholders is $180,000 and to common stockholders is $120,000.

Answer 2

(a) noncumulative

Preferred share: $120,000

Common share: $180,000

(b) cumulative

Preferred share: $123,600

Common share: $176,400

Step-by-step explanation:

Preferred stock outstanding = 10,000 shares * $100 par value = $1,000,000

(a) if the preferred stock interest is noncumulative, the the total dividend paid of 2 years = preferred stock outstanding x rate x 2 years

= $1,000,000 * 6% * 2 = $120,000

Dividend for common stock = total cash dividend - dividend for preferred stock = $300,000 - $120,000 = $180,000

(b) if the preferred stock interest is noncumulative, the the total dividend paid of 2 years = preferred stock outstanding * (1+ rate)^2 - preferred stock outstanding

= $1,000,000*(1+6%)^2 - $1,000,000 = $123,600

Dividend for common stock = $300,000 - $123,600 = $176,400