Question

Dividends on preferred stock.

In each of the following independent cases, it is assumed that the corporation has $800,000 of 6% preferred stock and $3,200,000 of common stock outstanding, each having a par value of $10. No dividends have been declared for 2013 and 2014.

(a) As of 12/31/15, 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 12/31/15, it is desired to distribute $800,000 in dividends. How much will the preferred stockholders receive if their stock is cumulative and participating up to 11% in total?

(c) On 12/31/15, the preferred stockholders received a $240,000 dividend on their stock which is cumulative and fully participating. How much money was distributed in total for dividends during 2015?

Answer 1

Answer a)

As the Preferred stocks are Cumulative, the Dividend in arrears for Year 2013 & 2014, will be given along with the Dividend for the Year 2015.

Preferred Stockholder’s Dividend = ($ 800,000 * 6% * 3 years) = $ 144,000

Answer b)

As the Preferred stocks are Cumulative, the Dividend in arrears for Year 2013 & 2014, will be given along with the Dividend for the Year 2015.  Also, as per given, the dividend for participation upto 11 % ( in excess of 6%), would be received by them for the current year.

Preferred Stockholder’s Dividend = ($ 800,000 * 6% * 3 years) + ($ 800,000 * (11% - 6%)

Preferred Stockholder’s Dividend = $ 144,000 + $ 40,000 = $ 184,000

Answer c)

Dividend distributed to Preferred Stockholders = $240,000

Dividend to Common Stockholders

= ($3,200,000 x .06) + [($240,000 - $144,000) ÷ $800,000) x $3,200,000]

= $576,000

Therefore Total Dividend distributed = ($576,000 + $240,000) = $816,000