Question

At the beginning of its’ first year, Stone Corp. had the following capital structure:

Preferred shares- 5,000 issued, 6%                          $100,000

Common shares- 8,000 issued                                  $400,000

                                                                                                $500,000

Dividends declared and paid were as follows in its’ first two years: Yr. 1- $5,000; Yr. 2- $41,000

Required:

Prepare a table showing the amount of dividends paid in Yr. 1 and Yr. 2 to each class of shareholder under the following assumptions:

1. The preferred stock is noncumulative and non participating;
2. The preferred stock is cumulative and fully participating;
3. The preferred stock is cumulative and participating after the Common shares receive 8% of their invested capital.

Answer 1

Requirement A
	Year 1	Year 2
Dividends Paid	5000	41000
Preferred stock dividend	5000	6000
Common Stock dividend		35000
In Year1 , as preferred stock is noncumulative and non-Participating, dividend paid is less than preferred stock dividend (100,000 X6%) , so total dividend paid to be made to preferrence shareholders.
Requirement B
	Year 1	Year 2
Dividends Paid	5000	41000
Preferred stock dividend	5000	7000
Common Stock dividend		34000
As preferred stock is cumulative and non-Participating, balance preferred dividend payable in Year 1 ($1,000) is to be payable in Year 2.
Requirement C
	Year 1	Year 2
Dividends Paid	5000	41000
Preferred stock dividend		9000
Common Stock dividend	5000	32000
In Year 1, preferred stock is cumulative and non-Participating after the common shares return @8% on invested capital, so total dividend goes to common shareholders.
In year 2, Common stock dividend (400,000 *8%) i.e, 32,000 and balance will goes to preferred shareholders - Year 2 (100,000 *6%) and Year 1 (41,000-32,000-6,000)