Question

The stockholders' equity section of Giants Corporation shows the following on December 31, 2019:

Preferred stock—8%, $50 par, 8,000 shares outstanding $ 400,000

Common stock—$10 par, 60,000 shares outstanding 600,000

Paid-in capital in excess of par 600,000

Retained earnings 500,000

Total stockholders' equity $2,100,000

Instructions

Assume that Giants has decided to declare and pay $400,000 in cash dividends on 12/31/19 and that preferred dividends were last paid on 12/31/15, show how much the preferred and common stockholders should receive if the preferred stock is cumulative and participating. You MUST show your work to receive any credit.

Answer 1

Solution:-

In this particular question we have to find the value of cash dividends which will be distributed between equity and preference shareholders.

As we know that cumulative preference shares are those shares for which dividend must be paid and accrues untill it will be paid for any year .

So, in this question we can see here that last payment of dividend for preference shareholders was untill 31st Dec 2015 and so we have to first make payment for 4 years 2016, 2017, 2018 and 2019 to preference shareholders after that we can make payment to equity shareholders.

preference dividend part = 4 * per year preference dividend

= 4 ( $ 400,000* 8%)

= 4 * $ 32000

= $ 128,000

Equity Dividend part = Total Dividend - Preference Dividend

= $ (400,000 - 128,000 )

= $ 272,000