Question

Preferred stock— $25 par value, 10,000 shares authorized, 5,200 shares issued and outstanding	$	130,000
Common stock—$10 par value, 100,000 shares authorized, 80,000 shares issued and outstanding		800,000
Total paid-in capital	$	930,000
Retained earnings		550,000
Total stockholders’ equity	$	1,480,000
The number of issued and outstanding shares of both preferred and common stock have been the same for the last two years. Dividends on preferred stock are 8 percent of par value and have been paid each year the stock was outstanding except for the immediate past year. In the current year, management declares a total dividend of $50,000. a. Indicate the amount that will be paid to both preferred and common stockholders assuming the preferred stock is not cumulative. b. Indicate the amount that will be paid to both preferred and common stockholders assuming the preferred stock is cumulative.

Answer 1

Requirement (a) - The amount that will be paid to both preferred and common stockholders assuming the preferred stock is not cumulative.

Dividend to Preferred stockholders = $10,400 [5,200 shares x $25 x 8%]

Dividend to Common stockholders = $39,600 [$50,000 – 10,400]

Requirement (b) - The amount that will be paid to both preferred and common stockholders assuming the preferred stock is cumulative.

Dividend to Preferred stockholders = $20,800 [5,200 shares x $25 x 8% x 2 Years]

Dividend to Common stockholders = $29,200 [$50,000 – 20,800]