Question

In each of the following independent cases, it is assumed that the corporation has $600,000 of 6% preferred stock and $2,400,000 of common stock outstanding, each having a par value of $10. No dividends have been declared for 2011 and 2012.

(a) As of 12/31/13, it is desired to distribute $250,000 in dividends. How much will the preferred stockholders receive if their stock is cumulative and nonparticipating?

(b) As of 12/31/13, it is desired to distribute $600,000 in dividends. How much will the preferred stockholders receive if their stock is cumulative and participating up to 11% in total?

(c) On 12/31/13, the preferred stockholders received a $180,000 dividend on their stock which is cumulative and fully participating. How much money was distributed in total for dividends during 2013?

Answer 1

ANSWER TO QUESTION

(a) Here in this question, the company has not paid any dividend in the year 2011 and 2012. Therefore Preferred stock holders are entitled to receive dividend for 3 years i.e. 2011, 2012 and 2013.

Total Dividend received by Preferred Stockholders = ( $600,000 x 6% x 3 yrs)

= $108,000.

(a) Here in this question, the company has not paid any dividend in the year 2011 and 2012. Therefore Preferred stock holders are entitled to receive dividend for 3 years i.e. 2011, 2012 and 2013. Also the dividend for participation upto 11 % would be received by them. Therefore Dividend in excess of 6% upto 11% would also be received for the current year.

Total Dividend received by Preferred Stockholders = ( $600,000 x 6% x 3 yrs) + ($600,000 x (11%-6%)

= $138,000.

(c) Calculation of Total Dividend distributed.

Dividend distributed to Preferred Stockholders = $180,000

Dividend to Common Stockholders

= ($2,400,000 x .06) + [($180,000 - $108,000) ÷ $600,000) x $2,400,000]

= $432,000

Therefore Total Dividend distributed = ($432,000 + $180,000)

= $612,000