Question

Sunland, Inc. has $500,000, $0.50, no par value preferred shares (50,000 shares) and $1,000,000 of no par value common shares outstanding (80,000 shares). No dividends were paid or declared during 2018 and 2019. The company wants to distribute $320,000 in dividends on December 31, 2020.

QUESTIONS:

A)

Calculate the amount of dividends to be paid to each group of shareholders (i.e. preferred and common), assuming the preferred shares are non-cumulative and non-participating. Preferred Common Total dividends $ $

B)

Calculate the amount of dividends to be paid to each group of shareholders (i.e. preferred and common), assuming the preferred shares are cumulative and non-participating. Preferred Common Total dividends $ $

C)	Calculate the amount of dividends to be paid to each group of shareholders (i.e. preferred and common), assuming the preferred shares are cumulative and fully participating. Preferred Common Total dividends $ $

Answer 1

A)In case of non-cumulative preference shares ,any dividend in arrear is not paid .

Preferred dividend = Number of shares outstanding * dividend per share

            = 50000 * .50

            = 25000

	Preferred stock	common stock	Total
Amount of dividend	25000	320000-25000=295000	320000

B)

In case of Cumulative preference shares ,any preferred dividend in arrear is paid in preference to current period preferred and common stock dividend

Preferred dividend is in arrear for 2018 & 2019 = 2 years * 25000 =50000

	Preferred stock	common stock	Total
Dividend in arrear	50000	0	50000
current dividend	25000	320000-75000 (total preferred dividend )=245000	270000
Total dividend paid	75000	245000	32000

3)

In case of participating preference shares ,Any excess dividend after paying dividend in arrear and current dividend to both stockholders is shared between both stockholders in their par value ratios.

	par value	weights
Preferred	500000	500000/1500000 = .33333
common	1000000	1000000/1500000=.66667
Total	1500000

	Preferred stock	common stock	Total
Dividend in arrear	50000	0	50000
current year dividend	25000	80000*.50 =40000 (equivalent to preferred dividend rate)	65000
Remaining dividend in par value ratios (320000-50000-65000=205000)	205000*.33333= 68333	136667	205000
Total dividend paid	143333	176667	320000