Question

In: Economics

Sierra Services, Inc. has issued 20,000 shares of cumulative preferred stock that pay $0.5 per share....

Sierra Services, Inc. has issued 20,000 shares of cumulative preferred stock that pay $0.5 per share. The firm also has 100,000 shares outstanding of common stock.

Part 1
If in the current year, the firm has $500,000 earmarked for dividends, what is the earning of a common stock holder per share?

Expert Solution

In case a company pay dividend then dividend is first paid to cumulative preferred stock holders.

After that the residual dividend is distributed to the common stock holders.

Amount earmarked for the dividend = $500,000

There are 20,000 shares of cumulative preferred stock that pays $0.5 per share.

Dividend paid to cumulative preferred stockholders = Total number of cumulative preferred stock * Amount paid per share = 20,000 * $0.5 = $10,000

So,

The dividend paid to cumulative preferred stock holders is $10,000.

Residual dividend = Total amount earmarked for dividend - Dividend paid to cumulative preferred stock holders = $500,000 - $10,000 = $490,000

Thus, the residual dividend is $490,000.

Calculate the earning per share of common stock holders -

EPS = Residual dividend/Number of common stock shares outstanding

EPS = $490,000/100,000

EPS = $4.90

Thus,

The Earning Per Share of a common stock holder is $4.90.

Rahul Sunny answered 1 year ago

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