Question

Exercise 11.6 Preference share Alternatives L.O. 5, 6 Walker Limited has the following capital structure: Preference shares— $25 par value, 10,000 shares authorized, 8,900 shares issued and outstanding Ordinary shares— 510 par value, 100,000 shares authorized 80,000 shares issue and outstanding $ 222,500 800,000 Total issued and fully paid capital Retained earnings $1,022,500 550,000 Total shareholders' equity $1,572,500 The number of issued and outstanding shares of both preference and ordinary shares have been the same for the last two years. Dividends on preference shares are 8 percent of par value and have been paid each year the share 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 preference and ordinary shareholders assuming the preference shares is not cumulative. (Omit the "S" sign in your response.) Amount to preference shares Amount to ordinary shares A A b. Indicate the amount that will be paid to both preference and ordinary shareholders assuming the preference shares is cumulative. (Omit the "S" sign in your response.) Amount to preference shares Amount to ordinary shares GA A

Answer 1

a.If preferred stock is non-cumulative:

Total dividend Amount to preferred stock(8,900*25*8%) Amount to common stock $50,000 ($17,800) $32,200

Amount to preferred stock Amount to common stock $17,800 $32,200

b.If preferred stock is cumulative:

$50,000 Total dividend Amount to preferred stock Current year Amount to common stock $17,800 $17,800 ($35,600) $14,400

Amount to preferred stock Amount to common stock $35,600 $14,400