Question

Green Planet Corp. has (a) 5,600 shares of cumulative 11% preferred stock with a $2 par value and (b) 19,600 shares of common stock with a $0.01 par value. During its first two years of operation, Green Planet declared and paid the following total cash dividends. Compute the dividends paid each year to each of the two classes of stockholders: preferred and common.

Year 1 total cash dividends	$	760
Year 2 total cash dividends	$	1,960

Year 1 Cumulative preferred? ____ Common?____

Year 2 Cumulative preferred? ____ Common?____

Answer 1

Cumulative preference shares are given priority in dividend payments before common stock holders, further in case of cumulative preference shares the arrears of dividend of previous year are paid first and if any amount remains after payment of preferred shares is distributed to common stockholders.

In the given case, Green planet corp. has 5600 cumulative preference shares@11% dividend paying par value of $ 2 , and common stocks are 19600 shares @0.01 par value.

For year1

Preference shares dividend = Preference shares value × Rate of dividend.

Preference shares dividend = 5600× $ 2 × 11%

Preference shares dividend = $ 1,232.

But here we should note that dividend declared is only $ 760, so $ 1232 can not be paid, only $ 760 will be paid to preferred stockholders and remaining of $ 472 (1232-760) will be payable. Further no dividend will be paid to common stockholders.

Thus, Year -1: Payment to Preferred stockholders = $ 760 and Common stockholders = $ 0.

For year 2:

Dividend declared is $ 1960, here first will pay the earlier year unpaid preferred stock dividend then current year preferred stock dividend and if any amount remains will be paid to common stockholders.

Here payment to preferred stockholders = Year 1 due + current year dividend

Payment to Preferred stockholders = $ 472 + $ 1232 ( as calculated in year1).

Payment to preferred stockholders = $ 1,704.

Now, payment to common stockholders = Dividend declared - Payment to Preferred stockholders.

Payment to common stockholders = $ 1960 - $ 1704.

Payment to common stockholders = $ 256.

Thus Year-2 : Payment to Preferred stockholders = $ 1704 and common stockholders = $ 256.