Question

Ritz Company had the following stock outstanding and Retained Earnings at December 31, 2015: Common stock (par $1; outstanding, 570,000 shares) $ 570,000 Preferred stock, 9% (par $10; outstanding, 21,700 shares) 217,000 Retained earnings 907,000 On December 31, 2015, the board of directors is considering the distribution of a cash dividend to the common and preferred stockholders. No dividends were declared during 2013 or 2014. Three independent cases are assumed: Case A: The preferred stock is noncumulative; the total amount of 2015 dividends would be $37,000. Case B: The preferred stock is cumulative; the total amount of 2015 dividends would be $37,000. Dividends were not in arrears prior to 2013. Case C: Same as Case B, except the amount is $82,000. Required: 1-a. Compute the amount of dividends in total payable to each class of stockholders if dividends were declared as described in each case. 1-b. Compute the amount of dividends per share payable to each class of stockholders if dividends were declared as described in each case. (Round your answers to 2 decimal places.)

Answer 1

Answer:

Case A:
Total Dividend Declared = $37,000

As the Preferred Stock are Non-Cumulative, the dividend in arrear for the year 2013 and 2014 will not be paid.

Preferred Dividend per year = $217,000 * 9%
Preferred Dividend per year = $19,530

Total Dividend paid to Preferred Stockholders = $19,530
Total Dividend paid to Common Stockholders = $37,000 - $19,530 = $17,470

Dividend per Share payable to Preferred Stockholders = 19,530 / 21,700 = $0.90
Dividend per Share payable to Common Stockholders = 17,470 / 570,000 = $0.03

Case B:
Total Dividend Declared = $37,000

As the Preferred Stock are Cumulative, the dividend in arrear for the year 2013 and 2014 will be paid in priority to Current Year Dividend. If any amount remains after payment of arrear dividend, will be paid to Preferred stock and Common Stock holders respectively.

Preferred Dividend per year = $217,000 * 9%
Preferred Dividend per year = $19,530

Total Preferred Dividend in Arrear = $19,530 * 2 = $39,060

Total Dividend paid to Preferred Stockholders = $37,000
Total Dividend paid to Common Stockholders = 0

Dividend per Share payable to Preferred Stockholders = 37,000 / 21,700 = $1.71
Dividend per Share payable to Common Stockholders = 0

Case C:
Total Dividend Declared = $82,000

As the Preferred Stock are Cumulative, the dividend in arrear for the year 2013 and 2014 will be paid in priority to Current Year Dividend. If any amount remains after payment of arrear dividend, will be paid to Preferred stock and Common Stock holders respectively.

Preferred Dividend per year = $217,000 * 9%
Preferred Dividend per year = $19,530

Total Preferred Dividend in Arrear = $19,530 * 2 = $39,060
Current Year Preferred Stock Dividend = $19,530

Total Dividend paid to Preferred Stockholders = $39,060 + $19,530 = $58,590
Total Dividend paid to Common Stockholders = $82,000 - $58,590 = $23,410

Dividend per Share payable to Preferred Stockholders = 58,590 / 21,700 = $2.70
Dividend per Share payable to Common Stockholders = 23,410 / 570,000 = $0.04