Question

Lightfoot Inc., a software development firm, has stock outstanding as follows: 15,000 shares of cumulative preferred 4% stock, $20 par, and 19,000 shares of $100 par common. During its first four years of operations, the following amounts were distributed as dividends: first year, $4,500; second year, $7,500; third year, $39,010; fourth year, $63,110.

Calculate the dividends per share on each class of stock for each of the four years.

Answer 1

The dividends per share for preferred stock were $0.30, $0.50, $0.80, and $0.80 in the first, second, third, and fourth years, respectively. For common stock, dividends per share were $0, $0, approximately $1.42, and approximately $2.69 for the same years. Preferred dividends are paid first, with any remainder going to common shareholders.

Step-by-step explanation:

First, we need to calculate the annual dividend required to be paid for preferred stock before any dividends can be paid to common stockholders. Lightfoot Inc. has 15,000 shares of cumulative preferred 4% stock with a $20 par value, so the annual preferred dividend is 4% of $20 (par value) for each share: $20 x 0.04 = $0.80 per share. The total annual preferred dividend requirement is $0.80 per share x 15,000 shares = $12,000.

Now, we'll determine the dividends per share for each class of stock for each of the four years:

Note: If there were any dividends in arrears (unpaid from previous years) for preferred stock, they would need to be paid before common stockholders receive anything. Since the preferred stock is cumulative, any unpaid dividends from the first and second years are carried forward and need to be paid out before common shareholders can receive dividends. For this example, the third year's total dividend amount covers the two previous years' shortfalls and the current year's preferred dividends, allowing for common shareholders to receive dividends.

Answer 2

Dividend Payment per unit

Year Common Dividend Preferred Dividend

1. 0 $0.3

2. 0 $0.5

3. $0.79 $1.6

4. $2.69 $0.8

Step-by-step explanation:

Dividend distributed to preferred share is based on the predetermined rate associated with these share. When the dividend is declared preferred share dividend is paid first. The remainder is distributed between the common stockholders.

Value of Preferred share = 15,000 shares x $20 par value = $300,000

Dividend on Preferred share = $300,000 x 4% = $12,000 per year = $12,000 / 15,000 = $0.8 per share

Dividend Payment

Year Dividend Declared Common Dividend Preferred Dividend

1. $4,500 0 $4,500

2. $7,500 0 $7,500

3. $39,010 $15,010 $24,000

4. $63,110 $51,110 $12,000

Dividend Payment per unit

Year Common Dividend Preferred Dividend

1. 0 $4,500 / 15,000=$0.3

2. 0 $7,500 / 15,000=$0.5

3. $15,010/19,000 = $0.79 $24,000 / 15,000=$1.6

4. $51,110/19,000 = $2.69 $12,000 / 15,000=$0.8

Working

Year Dividend Declared Common Dividend Preferred Dividend Balance

1. $4,500 0 ( 4,500 - 12,000) = ( 7,500)

2. $7,500 0 (-7,500+7,500-12,000) = (12,000)

3. $39,010 $15,010 (-12,000+39,010-12,000) = 0

4. $63,110 $51,110 (63,110-12,000) = 0