Question

M. Swifty Corporation has 16,000 shares of 9 %, $ 100 par value, cumulative preferred stock outstanding at December 31, 2020 . No dividends were declared in 2018 or 2019 . If M. Swifty wants to pay $ 450,000 of dividends in 2020 . what amount of dividends will common stockholders receive?

Answer 1

Answer is:

amount of dividend is $66,000

This can be calculated as below:

Preference Shares = 16,000, 9%,Preference shares of 100 each

Preference share capital = 16000* $100= $ 1,600,000

Dividend Declared = $450,000

Preference Dividend

Preference Dividend for one year = $ 1,600,000 *8% = $ 128,000

Therefore arrear dividends include, 2018, 2019 and current year 2020.

Therefore Preference Dividend payable for 3 years= $ 128,000 *3 years = $ 384,000

Dividend to be received by Common stock holders

Dividend Declared                                                          = $450,000

Less: dividend paid to preference share holders      ($384,000)

Dividend to be received by Common stockholders   $66,000

Therefore the amount of dividend is $66,000

Explanation: The common stock holders are the owners of the firm and they are entitled to the dividend after paying divided to the preference shareholders. Here the corporation has not declared any dividend and in the current year they have declared a dividend of $ 450,000. But there is a rule to provide dividends including arrear dividends to the preference shareholder at first and they hold the preferential right to receive dividend. Therefore common stockholders get dividends only after paying to the preference shareholders. Thus here the common stock holders received a dividend of $66,000.