Question

(5 points) Cheyenne Corp. had 5,000 shares of 7%, $100 par value preferred stock and 40,000 shares of $5 par value common stock outstanding throughout 2018. No dividends were paid in 2016 or 2017. Determine the dividend amount that should go to common and preferred shareholders for the following scenarios. a. Assuming that total dividends declared in 2018 were $150,000, and that the preferred stock is not cumulative and is not participating. Common Shareholders' Dividends Preferred Shareholders' Dividends b. Assuming that total dividends declared in 2018 were $150,000, and that the preferred stock is cumulative and is not participating. Common Shareholders' Dividends Preferred Shareholders' Dividends C. Assuming that total dividends declared in 2018 were $150,000, and that the preferred stock is not cumulative and is fully participating. Common Shareholders' Dividends Preferred Shareholders' Dividends d. Assuming that total dividends declared in 2018 were $150,000, and that the preferred stock is cumulative and is fully participating. Common Shareholders' Dividends Preferred Shareholders' Dividends

Answer 1

Answer:

1.Participating Preferred Stock :

These are the sort of preferred stock which have right to participate in the surplus profit of the organization. These are where the fixed preference dividend conveying the privilege to take part in the excess of profit, however after the dividend at equivalent rates has been paid on all the equity shares.

2.Non-Participating Preferred Stock :

These kind of preferred stock doesn't enjoy the advantages of participating preferred stock. These stock despises the privilege in participating in the surplus profits of the organization and just fixed amount of dividend is paid on them by the organization which has been declared by the organization at the time of dissemination or distribution.

3.Cumulative Preferred Stock :

Cumulative preferred stock are those shares on which if the organization makes the default on proclaiming profit at whatever year, they convey the correct that the unpaid debts of profit or arrears of dividend of any earlier year will be paid on them before paying any profit to equity stock.

4.Non-Cumulative Preferred Stock:

Non-cumulative preferred stocks are those stock where the investor or shareholder gets a fixed amount of dividend every year except on the off chance that if the organization fails to pay dividend at whatever year, the investor can't guarantee the dividend in future.

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a)

When preferred stock in non- cumulative and non- participating:

• Preferred Stock Dividend= $100×7% = $100*0.07 =$7 per share;
• Preferred Stock Dividend =5,000 shares×$7 = $35,000
• Common stock Dividend = $1,50,000 - $35,000 =$ 1,15,000;
• Common stock Dividend = $1,15,000/40,000 = $2.875 per share
• Total dividend = $35,000 + $ 1,15,000 = $150,000

Explanation: First dividend of $35,000 will be distributed to preferred investors and remaining balance of $1,15,000 will be given to equity investors.

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b)

When preferred stock in cumulative and non-participating:

• Preferred Stock dividend = 5,000×$7 =$35,000 in 2018
• Preferred Stock dividend arrears = (5,000×$7)*2 =$70,000 in 2016 & 2017
• Total preferred stock dividend =$35,000 + $70,000 =$ 1,05,000
• Common stock dividend = $ 1,50,000 -$ 1,05,000 =$ 45,000
• Common stock dividend = $ 45,000/ 40,000 shares = $ 1.125 per share
• Total Dividend = $1,05,000 + $ 45,000 = $150,000

Explanation: For this situation since preferred stock is cumulative, arrears of profit for the year 2016 and 2017 will be paid in 2018 preceding paying any dividend to equity shareholders.After disseminating the unpaid debts and dividends to preferred shareholders parity will be paid to equity investors.

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c)

When preferred stock is non-cumulative and fully participating:

Determine the normal dividend on preferred stock:

• preferred stock dividend = $7× 5,000 shares = $35,000.

Now,determine an equal amount of dividend on common stock:

• Common stock dividend ($35,000/40,000)= $0.875× 40,000 shares = $35,000

Presently subtract the all out $70,000 from the retained earnings which the organization intends to pay as profits

• Remaining balance of retained earnings =  $150,000 - $70,000 = $80,000.

Presently include the all out number of preferred stocks to add up to number of common stocks

• Total shares = 5,000+ 40,000 = 45,000 shares

Divide the remaining retained earnings accessible to be distributed as profit or dividend by absolute number of shares = $80,000/45,000 shares = $1.778 per share

• Dividend for preferred stock($7+$1.778) = $8.778 × 5,000 shares = $43,890
• Dividend for common stock ($0.875+$1.778)= $2.653 × 40,000 shares = $106,110
• Total dividend = $43,890 + $106,110 = $150,000

Explanation:

For this situation as preferred stock is participating they have been paid out of the surplus dividend alongside equity investors subsequent to dispersing an equivalent amount of profit on normal stock.

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d)

When preferred stock is cumulative and fully participating :

• Present year Dividend on preferred stock =$7×5,000 =$35,000
• Arrears on preferred stock = ($7×5,000)*2 = $70,000

Dividend to equity shareholders equal to preferred stock present year's dividend:

• Common stock dividend ($35,000/40,000)= $0.875× 40,000 shares = $35,000

Retained earnings available to be distributed as dividend after paying the above dividends :

• Balance of retained earnings$150,000 - $140,000 = $10,000
• Total number of shares = 45,000 shares ( 5,000+40,000)
• Extra dividend to preferred stock ($10,000/45,000)=$0.222.. ×5,000 shares = $1,111
• Extra dividend to common stock ($10,000/45,000) =$0.222.. × 40,000 shares = $8,889.
• Total Preferred Stock Dividend Current year = $35,000 + $1,111 =$36,111
• Total arrears to preferred stock = $70,000
• Total dividend on common stock = $35,000 + $8,889 = $43,889
• Dividend arrears = $ 70,000/5,000 =$ 14 per share
• Common stock =  $43,889/40,000 = $1.097 per share
• Total retained earnings or dividend=$36,111+$70,000+$43,889 = $ 1,50,000

Explanation:

For this situation preferred stocks are aggregate and cumulative and participating so first current year's profit and back payments of profits of past two years has been disseminated to preferred stock than a sum equivalent to preferred investors current year's profit has been distributed to equity investors. After the above the balance retained earnings available for distribution as profit has been distributed proportionately to common stock and preferred investors.