Question

The outstanding share capital of Marginal Utility Corporation consists of 6,000 preferred shares with a book value of $420,000 and 22,000 common shares with a book value of $220,000. The preferred shares carry a dividend of $6 per share and have a $70 stated value.

Required:

Assuming that the company has retained earnings of $340,000 that is to be entirely paid out in dividends and that preferred dividends were not paid during the two years preceding the current year, state how much each class of shares should receive under each of the following conditions:

1. The preferred shares are non-cumulative and non-participating.
2. The preferred shares are cumulative and non-participating.
3. The preferred shares are cumulative and participating.

Answer 1

1) The preferred shares are non-cumulative and non-participating.
Preferred Dividend = 6000 shares x $6 per share	$    36,000.00
Common Dividend = $340,000 - 36000	$ 3,04,000.00
2) The preferred shares are cumulative and non-participating.
Preferred Dividend = 6000 shares x $6 per share x 3 years	$ 1,08,000.00
Common Dividend = $340,000 - $108,000	$ 2,32,000.00
3)The preferred shares are cumulative and participating.
Preferred Dividend = $108000 + $65,625	$ 1,73,625.00
Common Dividend = (22000 x $6) + $34,375	$ 1,66,375.00
Par value of shares that are to participate
Preferred Shares = 6000 x $70	$ 4,20,000.00
Common Shares	$ 2,20,000.00
Total Shares	$ 6,40,000.00
Additional amount available for participation = ($340,000 - 108000 -(22000 x $6)	$ 1,00,000.00
participating amount
Preferred = 100000 X $420,000/$640,000	$    65,625.00
Common = 100000 x 220,000/$640,000	$    34,375.00