Question

Calculator Dividends Per Share Lightfoot Inc., a software development firm, has stock outstanding as follows: 40,000 shares of cumulative preferred 1% stock, $125 par and 100,000 shares of $150 par common. During its first four years of operations, the following amounts were distributed as dividends: first year, $36,000; second year, 558,000; third year, $75,000; fourth year, $124,000 Determine the dividends per share on each class of stock for each of the four years. Round your answers to two decimal places. If no dividends are paid in a given year, enter "0" 1st Year 2nd Year 3rd Year 4th Year Preferred stock (dividends per share) Common stock (dividends per share)

Answer 1

Solution

Lightfoot Inc

Determination of the dividends per share on each class of stock for each of the four years:

Calculation of dividends on cumulative preferred stock:

Dividends paid	Year 1	Year 2	Year 3	Year 4
1% Cumulative Preferred Stock	$36,000	$58,000	$56,000	$50,000
Common Stock	0	0	$19,000	$74,000

Dividends per share:	Year 1	Year 2	Year 3	Year 4
1% Cumulative Preferred Stock	$0.90	$1.45	$1.40	$1.25
Common Stock	0	0	$0.19	$0.74

dividend per share = dividends/number of shares

for instance, preferred dividend per share for first year = $36,000/40,000 shares = $0.90 per share

dividend per share for common stock, year 3 = $19,000/100,000 shares = $0.19 per share

Explanation and computations:

1% Preferred stock - $5,000,000

Preferred stockholders are given preference in payment of dividends over common stockholders. Preferred stock dividends are paid first and any remaining dividends amount is paid to common stock holders.

Also, since, the preferred stock is cumulative in nature, the unpaid preference dividends are paid in the subsequent year.

Computations:

Preferred dividend for first year – 5,000,000 x 1% = $50,000

Preferred dividends paid in first year = $36,000

Since, the preferred stock is cumulative, the unpaid dividends accumulate and are paid along with the dividends of subsequent year.

Hence, dividends for preferred stock in second year = 50,000 + (50,000 – 36,000) = $64,000

Dividends paid in second year = $58,000

Unpaid dividends in second year = 64,000 – 58,000 = $6,000

Preferred Dividends payable in third year = 50,000 + 6,000 = 56,000

Dividends paid in third year = 75,000

Less: preferred dividends = 56,000

Dividends for common stock = $19,000

Preferred Dividends payable in fourth year = 50,000

Dividends paid = $124,000

Dividends for common stockholders = 124,000 – 50,000 = $74,000

The excess of dividends paid after the preferred dividends is entirely paid to the common stockholders.