Question

25 Green Planet Corp, has (a) 6,000 shares of cumulative 11% preferred stock with a $2 par value and (b)19,800 shares of common stock with a $0,01 par value. During its first two years of operation, Green Planet declared and paid the following total cash dividends. Compute the dividends paid each year to each of the two classes of stockholders preferred and common 0.25 points Year 1 total cash dividends Year 2 total cash dividends $ 830 $1,989 eBook References Cumulative Preferred Common Year 1 Year 2

Answer 1

The cumilative preferred stock has the right to receive specified dividend before other classes of preferred stock shareholders and common shareholders can receive dividend payments. As the cumulative feature reduces the dividend risk to investors, cumulative preferred stock can usually be offered with a lower payment rate than required for a noncumulative preferred stock. The preferred stock is paid only the specified dividend.

As per rules, if the company cannot afford to pay dividend in any year , it can suspend its dividend payment to preferred shareholders. Eventually, when the company recovers, holders of the cumulative preferred stock shares should receive all dividend payments in arrears(of past years too) before other preferred stock shareholders or common stockholders get the dividend.

here, the company has

Particulars	Number	Par value	Total value	Rightful dividend
cumulative 11% preferred stock	6000	$       2.00	$ 12,000.00	1320	($12000*11%)
Common stock	19800	$       0.01	$       198.00

Year 1

Total cash dividend = $830

Dividend which have to be paid to cumulative preferred stockholders = $1320

Dividend owes to cumulative preferred stockholders = $1320-830

                                                                                                =$490

This year, only $830paid to cumulative preferred stockholders (instead of $ 1320). And nothing is paid to common stockholders.

Year 2

Total cash dividend= 1980

Dividend which have to be paid to cumulative preferred stockholders = $ 1810    

                                                                                                           (Present year $1320+ past year arrear $490)

Dividend paid to common stock shareholders= 1980-1810

                                                                                   = $170

	Cumulative Preferred	Common
Year 1	$             830.00	$                      -
Year 2	$         1,810.00	$             170.00