Question

McBean Company has outstanding 15 million shares of $3 par value common stock and 1.5 million shares of $5 par value preferred stock. The preferred stock has a 8% dividend rate. The company declares $9,000,000 in total dividends for the year. Preferred Dividends in arrears are $450,000. a. Compute the amount of dividends to be distributed to preferred shareholders. (Enter your answer in dollars and not in millions.) b. Compute the amount of dividends to be distributed to common shareholders. (Enter your answer in dollars and not in millions.)

Answer 1

Solution:
a.	The amount of dividends to be distributed to preferred shareholders = $1,050,000
Working Notes:
	Before paying any dividend to common stockholders , all the arrears and current dividend should be paid to Preferred stockholders
	The amount of dividends to be distributed to preferred shareholders = Preferred Dividends in arrears + Current year preferred dividend
		=$450,000 + 8% x (1,500,000 x $5 )
		=$450,000 + $600,000
		=$1,050,000
b.	The amount of dividends to be distributed to common shareholders = $7,950,000
Working Notes:
	The amount of dividends to be distributed to common shareholders =Total dividend declares - The amount of dividends to be distributed to preferred shareholders
		=$9,000,000 -$1,050,000
		=$7,950,000
Please feel free to ask if anything about above solution in comment section of the question.