Question

Halverstein Company's outstanding stock consists of 11,900 shares of cumulative 5% preferred stock with a $10 par value and 5,100 shares of common stock with a $1 par value. During the first three years of operation, the corporation declared and paid the following total cash dividends.

	Dividend Declared
Year 1	$	0
Year 2	$	10,200
Year 3	$	43,000

The amount of dividends paid to preferred and common shareholders in Year 2 is:

Answer 1

Answer 2

To calculate the total dividends paid to each class of stock, we need to consider the dividend preference of the preferred stock and distribute the remaining dividends to the common stock.

1. Calculate the total dividends paid to the preferred stock: The preferred stock is cumulative and has a fixed dividend rate of 5%. This means that any unpaid dividends accumulate and must be paid before any dividends can be distributed to the common stock.

In Year 1, no dividends were declared, so the preferred stock did not receive any dividends.

In Year 2, the preferred stock is entitled to receive dividends for both Year 1 and Year 2. The total dividends paid to the preferred stock in Year 2 would be: Dividends = Preferred shares * Par value * Dividend rate = 11,900 shares * $10 par value * 5% = $5,950

In Year 3, the preferred stock is entitled to receive dividends for Year 3. The total dividends paid to the preferred stock in Year 3 would be: Dividends = Preferred shares * Par value * Dividend rate = 11,900 shares * $10 par value * 5% = $5,950

Therefore, the total dividends paid to the preferred stock over the first three years would be $5,950 + $5,950 = $11,900.

2. Calculate the total dividends paid to the common stock: The remaining dividends after paying the preferred stock are available for distribution to the common stock.

In Year 1, no dividends were declared for the common stock.

In Year 2, the total dividends paid to the common stock would be: Dividends = Total dividends - Dividends paid to preferred stock = $10,200 - $5,950 = $4,250

In Year 3, the total dividends paid to the common stock would be: Dividends = Total dividends - Dividends paid to preferred stock = $43,000 - $5,950 = $37,050

Therefore, the total dividends paid to the common stock over the first three years would be $4,250 + $37,050 = $41,300.

In summary: Total dividends paid to the preferred stock = $11,900 Total dividends paid to the common stock = $41,300