Question

When Custom Masks Inc. was organized in January 1, Year 1. It immediately issued 20,000 shares of $100 par, 5% cumulative preferred stock and 80,000 shares of $15 par common stock.

Custom Masks Inc. dividend history is as follows.

Year 1, no dividend

Year 2, no dividend

Year 3, $500,000 dividend declared.

1. How much is the dividend arrearage as of Jan 1, Year 2?
2. How will the Year 3 dividend be split between preferred and common stockholders?

Answer 1

Annual preferred dividends = Number of preferred shares x Par value per preferred share x Dividend rate on preferred shares

= 20,000 x 100 x 5%

= $100,000

a)

Since no dividend was paid in year 1, hence dividend in arrears as of Jan 1, Year 2 is $100,000

b)

No dividend was paid in year 1 and year 2, hence preferred dividend in arrears at the end of year 2 is $200,000.

In year 3, preferred stockholders will get dividend in arrears for two years and current year's dividend.

Dividend received by preferred stockholders = Dividend in arrears + Current year's dividend

= 200,000 + 100,000

= $300,000

Dividend received by common stockholders = Total dividends declared - Dividend received by preferred stockholders

= 500,000 - 300,000

= $200,000