An accountant at a small company is trying to calculate how dividends (a share of the...
An accountant at a small company is trying to calculate how dividends (a share of the company's profits) should be distributed to shareholders. The company made enough profit to pay all the shareholders 6% of the value of their stocks- if the money were divided equally. But actually some of the shareholders own $4 million in preferred stocks, which are guaranteed to pay 7.5% of their value in dividends. This means there is only enough money left over to pay the other shareholders 5% of the common stocks' value. What is the value of the common stocks?
Homework Answers
Preferred stock holders will get an additional $0.06 million which will be borne by the common stock holders.Therefore $0.06 divided by the change in 1% change is equal to $ 6 million.
To elaborate this,
| At 6% Dividend on all stock | |||
| Preferred | Common | Total | |
| Stock Value | 4 | 6 | 10 |
| Rate of Dividend | 6% | 6% | 6% |
| Dividend | 0.24 | 0.36 | 0.60 |
| At 5% Dividend to common stock | |||
| Preferred | Common | Total | |
| Stock Value | 4 | 6 | 10 |
| Rate of Dividend | 7.5% | 5% | 6% |
| Dividend | 0.30 | 0.30 | 0.60 |
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