Question

1. Diamond declares cash dividends of $ 28 comma 000 for 2018. How much of the dividends goes to preferred​ stockholders? How much goes to common​ stockholders?

2. Assume the preferred stock is cumulative and Diamond passed the preferred dividend in 2016 and 2017. In 2018​, the company declares cash dividends of $ 30 comma 000. How much of the dividend goes to preferred​ stockholders? How much goes to common​ stockholders?

3. Assume the preferred stock is noncumulative and Diamond passed the preferred dividend in 2016 and 2017. In 2018​, the company declares cash dividends of $ 30 comma 000. How much of the dividend goes to preferred​ stockholders? How much goes to common​ stockholders?

Preferred Stock—4%, $10 Par Value; 7,000 shares authorized, 5,500 shares issued and outstanding Common Stock—$0.25 Par Value; 2,400,000 shares authorized, 1,700,000 shares issued and outstanding

Requirement 1. Diamond declares cash dividends of $ 28 comma 000 for 2018. How much of the dividends goes to preferred​ stockholders? How much goes to common​ stockholders? ​(Complete all input boxes. Enter​ "0" for any zero​ amounts.) Diamond​'s dividend would be divided between preferred and common stockholders in this​ manner: Total Dividend 28000 Dividend to preferred stockholders: Dividend in arrears 0 Current year dividend Total dividend to preferred stockholders Dividend to common stockholders

Requirement 2. Assume the preferred stock is cumulative and Diamond passed the preferred dividend in 2016 and 2017. In 2018​, the company declares cash dividends of $ 30 comma 000. How much of the dividend goes to preferred​ stockholders? How much goes to common​ stockholders? ​(Complete all input boxes. Enter​ "0" for any zero​ amounts.) Diamond​'s dividend would be divided between preferred and common stockholders in this​ manner: Total Dividend Dividend to preferred stockholders: Dividend in arrears Current year dividend Total dividend to preferred stockholders Dividend to common stockholders

Requirement 3. Assume the preferred stock is noncumulative and Diamond passed the preferred dividend in 2016 and 2017. In 2018​, the company declares cash dividends of $ 30 comma 000. How much of the dividend goes to preferred​ stockholders? How much goes to common​ stockholders? ​(Complete all input boxes. Enter​ "0" for any zero​ amounts.) Diamond​'s dividend would be divided between preferred and common stockholders in this​ manner: Total Dividend Dividend to preferred stockholders: Dividend in arrears Current year dividend Total dividend to preferred stockholders Dividend to common stockholders

Answer 1

Preferred Stock : 4%, $10 par value 5,500 shares issued and outstanding

Common stock : $0.25 par value, 1,700,000 shares issued and outstanding

(Note: dividend is payable on issued and outstanding stock and not authorized capital of a Company, so we will consider issued and outstanding number of shares in both cases)

So, yearly dividend due to preference shareholders = 4% per share * $10 par value * 5,500 shares

= $2,200

Balance cash dividends declared, if any, would be allocated to common shareholders. However, the first right to any dividend is first of preference shareholders (by its very definition).

Requirement 1.

Total dividend declared in 2018 = $28,000

Dividend payable to preferred stockholders = $2,200 (as per calculation above)

Dividend allocated to common stockholders (balance dividend) = $28,000 - $2,200 = $25,800

Requirement 2.

Cumulative preferred stock is category of preferred stock whereby if in any year/years, the Company fails to pay dividend, the arrears will accumulate and be paid to preferred stockholders when the Company pays dividend. So, the unpaid dividends accumulate until paid.

In this requirement, Company does not pay dividend in 2016 and 2017.

So, Total dividend in arrears = $2,200 + $2,200 = $4,400

In 2018, Company declares dividend of $30,000

2018 dividend to preferred shareholders = $2,200

Add: Dividend in arrears = $4,400

Total dividend allocation to preferred stockholders = $6,600

Balance dividend allocation to common stockholders = $30,000 - $6,600 = $23,400

Requirement 3.

In case of non-cumulative preferred stock, the unpaid dividends in any years do not accumulate. The arrears are not paid later.

In this requirement, Company does not pay dividend in 2016 and 2017.

In 2018, Company declares dividend of $30,000

2018 dividend to preferred shareholders = $2,200

Add: Dividend in arrears = $ 0 ( since non-cumulative)

Total dividend allocation to preferred stockholders = $2,200

Balance dividend allocation to common stockholders = $30,000 - $2,200 = $27,800