Question

During the current year Colwell declared $66,000 in cash dividends to be paid to its preferred and common stockholders. The preferred stock has a total par value of $100,000, and dividend paying rate of 8%. There are two years of dividends in arrears. The common stock has a total par value of $300,000.

Required: Determine how much of the cash dividend amount of $66,000 should be paid to each shareholder group under each of the conditions stated below. (a) The preferred stock is cumulative and fully participating. (b) The preferred stock is noncumulative and nonparticipating (c) The preferred stock is noncumulative and is participating up to an additional 3% dividend rate.

Answer 1

Answer:

Colwell declared $66000 as dividend to be distributed among preferred and common stock holders.

Par value of preferred stock holders = $100,000

Par Value of common stock holders = $ 300,000

Ratio of stock holding

Preferred Stock holders Vs. Common stock holders

100000 : 300000

= 1:3

a) When the Preferred stock is cumulative and fully participating in nature, they have the right to receive any dividends in arrears (dividends not paid during previous years) along with current year dividend. Once, after distribution of preferred dividend, these shares will also have equal rights as of common stock holders in the balance declared dividend. Therefore the dividend distribution will be as follows:

b) When preferred stock is non cumulative and non participating in nature, it will not receive any dividends that were not paid during past years and it will also doesn't have any share in surplus dividends. Therefore the preferred stock holders would get preferred dividend of 8% on their par value. Therefore, in this instance the preferred share holders would get a preferred dividend of $8,000 and the balance of $58,000 would be distributed among common stock holders.

c) When preferred stock is non cumulative and is participating to an additional 3% dividend rate.

The preferred stock holders would receive an additional dividend of 3% over the actual dividend of 8%. Therefore, in this instance the preferred stock holders would receive a 11% dividend which is equal to $11000. The balance of $55000 would be distributed among common stockholders.