Question

Common stock, par $12 per share, 49,000 shares outstanding. Preferred stock, 8 percent, par $17.5 per share, 7,710 shares outstanding. Retained earnings, $238,000. On January 1, 2019, the board of directors was considering the distribution of a $63,800 cash dividend. No dividends were paid during 2017 and 2018. Required: Determine the total and per-share amounts that would be paid to the common stockholders and to the preferred stockholders under two independent assumptions: The preferred stock is noncumulative. The preferred stock is cumulative. Why were the dividends per share of common stock less for the cumulative preferred stock than the noncumulative preferred stock

Answer 1

a. The Preferred stock is noncumulative.

Preferred stock

= 7,710 * 17.5 * 8%

= $‭10,794‬

Per share

= 10,794/7,710

= $1.40

Common Shareholders.

= 63,800 - 10,794

= $‭53,006‬

Per share

= ‭53,006‬/49,000

= $1.08

b. Preferred stock is cumulative.

This means that if preferred dividends are not paid in a year, they will be accrued and paid when they can.

Preferred stock

= 7,710 * 3 years (2017,2018,2019)

= $‭23,130‬

Per share = 23,130/7,710

= $3

Common stock

= 63,800 - 23,130

= $‭40,670‬

Per share

= 40,670/49,000

= $0.83

c. Why were the dividends per share of common stock less for the cumulative preferred stock than the noncumulative preferred stock?

b. The dividends in arrears on the preferred stock had to be fulfilled before dividends could be paid for the current year.