Question

Waterway Industries has 165000 shares of $10 par value common stock and 82500 shares of $10 par value, 4%, cumulative, participating preferred stock outstanding. Dividends on the preferred stock are one year in arrears. Assuming that Waterway wishes to distribute $280000 as dividends, the common stockholders will receive

$115330.

$214000.

$164670.

$ 66000.

Answer 1

Annual preferred dividends = Number of preferred shares x Par value per preferred share x Preferred dividend rate

= 82,500 x 10 x 4%

= $33,000

	Preferred stock	Common stock	Total
Arrears dividend	33,000	0	$33,000
Current dividend	33,000	0	$33,000
Current dividend	0	1,650,000 x 4% = 66,000	$66,000
Balance dividend pro- rata	825,000 x 5.9798% = 49,330	1,650,000 x 5.9798% = 98,670	$148,000
Total dividend	$115,330	$164,670	$280,000

Preferred stock + Common stock = 825,000 + 1,650,000

= $2,475,000

Rate of participation = Balance dividend/Total of Preferred stock and Common stock

= 148,000/2,475,000

= 5.9798%

The common stockholders will receive TOTAL DIVIDENDS OF = $164,670

Third option is correct.