Question

The outstanding share capital of Flint Corporation consists of 3,300 shares of preferred and 7,400 common shares for which $281,200 was received. The preferred shares carry a dividend of $7 per share and have a $100 stated value.

Assuming that the company has retained earnings of $105,500 that is to be entirely paid out in dividends and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of shares should receive if the preferred shares are non-cumulative and non-participating.

		Preferred		Common		Total
Dividends		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount

  

  

Assuming that the company has retained earnings of $105,500 that is to be entirely paid out in dividends and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of shares should receive if the preferred shares are cumulative and non-participating.

		Preferred		Common		Total
Dividends		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount

  

  

Assuming that the company has retained earnings of $105,500 that is to be entirely paid out in dividends and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of shares should receive if the preferred shares are cumulative and participating. (Round answers to 0 decimal places, e.g. 5,275.)

		Preferred		Common		Total
Dividends		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places

  

  

Assume that Flint’s current year net income was $93,000. Calculate the current year payout ratio under each of the conditions below. (Round answers to 2 decimal places, e.g. 52.75.)

				Payout Ratio
(a)		The preferred shares are non-cumulative and non-participating.		enter payout ratio rounded to 2 decimal places
(b)		The preferred shares are cumulative and non-participating.		enter payout ratio rounded to 2 decimal places
(c)		The preferred shares are cumulative and participating.		enter payout ratio rounded to 2 decimal places

Answer 1

• WHEN THE PREFERRED STOCK IS NON CUMULATIVE AND NON PARTICIPATING, DIVIDENDS TO BE DISTRIBUTED AMONG PREFFERED AND COMMON SHAREHOLDERS ARE AS FOLLOWS

PREFFERED	COMMON	TOTAL
$23100	$82400	$105500

PREFFERED SHAREHOLDERS RECIEVE $7 PER SHARE.

TOTAL NUMBER OF PREFERRES STOCK OUTSTANDING= 3300 SHARES

THEREFORE, PREFERRED DIVIDENDS = 7*3300= $23100 //

THE REMAINING BALANCE IN THE RETAINED EARNINGS IS DITRIBUTED TO COMMON STOCKHOLDERS

COMMON STOCK DIVIDEND= RETAINED EARNINGS BALNCE-PREFERRED DIVIDEND

TOTAL AMOUNT IN THE RETAINED EARNINGS= $105500

105500 -23100 =$ 82400 //

• WHEN THE PREFERRED STOCK IS CUMULATIVE AND NON PARTICIPATING, DIVIDENDS TO BE DISTRIBUTED AMONG PREFFERED AND COMMON SHAREHOLDERS ARE AS FOLLOWS

PREFFERED	COMMON	TOTAL
$69300	$36200	$105500

PREFFERED SHAREHOLDERS RECIEVE $7 PER SHARE.

TOTAL NUMBER OF PREFERRES STOCK OUTSTANDING= 3300 SHARES

THEREFORE, PREFERRED DIVIDENDS TO BE PAID FOR CURRENT YEAR=7*3300= $23100 //

HOWEVER ,IT IS A CUMULATIVE PREFERRED STOCK.

CUMULATIVE PREFERRED STOCK REQUIRES THAT IF ANY DIDVIDEND HAVE BEEN MISSED PAYMENT IN THE PREVIOUS YEAR,IT MUST BE PAID BEFORE DISTRIBUTING TO THE COMMON SHAREHOLDERS.

THEREFORE $23100 FOR 2 YEARS HAD BEEN IN OUTSTANDING AND MUST BE PAID FIRST.

I.E 23100*20= $46200

TOTAL DIVIDENDS PAID TO PREFERRED SHAREHOLDERS = $23100+46200

$69300//

THE REMAINING BALANCE IN THE RETAINED EARNINGS IS DITRIBUTED TO COMMON STOCKHOLDERS

TOTAL AMOUNT IN THE RETAINED EARNINGS= $105500

COMMON STOCK DIVIDEND= RETAINED EARNINGS BALNCE-PREFERRED DIVIDEND

105500 -69300=$ 36200//

• WHEN THE PREFERRED STOCK IS CUMULATIVE AND PARTICIPATING, DIVIDENDS TO BE DISTRIBUTED AMONG PREFFERED AND COMMON SHAREHOLDERS ARE AS FOLLOWS

PREFFERED	COMMON
$69300	$36200

PREFFERED SHAREHOLDERS RECIEVE  $7 PER SHARE.

TOTAL NUMBER OF PREFERRES STOCK OUTSTANDING= 3300 SHARES

THEREFORE, PREFERRED DIVIDENDS TO BE PAID FOR CURRENT YEAR = 7*3300= $23100 //

HOWEVER ,IT IS A CUMULATIVE AND PARTICIPATING PREFERRED STOCK.

PARTICIPATING PREFERRED STOCK ARE THOSE WHICH PROVIDES AN ADDITIONAL DIVIDEND ALONG WITH THE PREFERRED DIVIDEND BASED ON SOME PREDETERMINED CONDITION.THE ADDITIONAL AMOUNT IS TO BE PAID ONLY IF THE DIVIDENDS PER COMMON SHARE EXCEEDS A SPECIFIED AMOUNT.

THEY CAN ALSO HAVE LIQUIDATION PREFERENCES IN THE EVENT OF LIQUIDATION.

IN THE ABOVE QUESTION THERE ARE NO CONDITIONS MENTIONED ,HENCE WE CAN ASSUME THAT THE DIVIDEND PER COMMON SHARE DIDNT EXCEED ANY REQUIRED CRITERIA.

CUMULATIVE PREFERRED STOCK REQUIRES THAT IF ANY DIDVIDEND HAVE BEEN MISSED PAYMENT IN THE PREVIOUS YEAR,IT MUST BE PAID BEFORE DISTRIBUTING TO THE COMMON SHAREHOLDERS.

THEREFORE $23100 FOR 2 YEARS HAD BEEN IN OUTSTANDING AND MUST BE PAID FIRST.

I.E 23100*20= $46200

TOTAL DIVIDENDS PAID TO PREFERRED SHAREHOLDERS = $23100+46200

$69300//

THE REMAINING BALANCE IN THE RETAINED EARNINGS IS DITRIBUTED TO COMMON STOCKHOLDERS

TOTAL AMOUNT IN THE RETAINED EARNINGS= $105500

COMMON STOCK DIVIDEND= RETAINED EARNINGS BALNCE-PREFERRED DIVIDEND

105500 -69300= $ 36200//

DIVIDEND PAYOUT RATIO= TOTAL DIVIDEND /NET INCOME

a) 82400/93000 = .88 b)36200/93000= .39 c)36200/93000= .39