Preferred stock 25 par value 10000 shares authorized 5200 sh

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.

Solution

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]