Question

GUY Inc., has $820,000 of 4% preferred stock and $1,150,000 of common stock outstanding, each having a par value of $10 per share. No dividends have been paid or declared during 2019 and 2020. As of December 31, 2021, it is desired to distribute $282,300 in dividends.

How much will the preferred and common stockholders receive under each of the following assumptions:

(a)		The preferred is noncumulative and nonparticipating.
(b)		The preferred is cumulative and nonparticipating.
(c)		The preferred is cumulative and fully participating.
(d)		The preferred is cumulative and participating to 7% total.

		Preferred stockholders		Common stockholders
(a)		$		$
(b)		$		$
(c)		$		$
(d)		$		$

Answer 1

ANSWER:

(a).

Noncumulative and nonparticipating:

In this case the preferred stockholders would get the current dividend preference up to 4%. There would be no arrear dividend for them because of non-declaring and non-paying earlier.    

Preferred dividend = Preferred stock × Preferred dividend rate

                                = $820,000 × 4%

                                = $32800 (Answer)

Common dividend = Total dividend – Preferred dividend

                               = $282,300 - $32,800

                               = $249,500 (Answer)

(b).

Cumulative and nonparticipating:

In this case preferred stockholders would get arrear dividends for 2019 and 2020 along with the current dividend (total for 3 years) up to 4%. The rest will go to the common stockholders.

Preferred dividend = (Preferred stock × Preferred dividend rate) × 3 years

                                = ($820,000 × 4%) × 3

                                = $98,400 (Answer)

Common dividend = Total dividend – Preferred dividend

                               = $282,300 - $98,400

                               = $183,900 (Answer)

(c).

Cumulative and fully participating:

In this case preferred stockholders would get arrear dividends for 2019 and 2020along with the whole amount of current dividend (total for 3 years). There would be nothing left for common stockholders.

Preferred dividend = $282,300

Common dividend = Total dividend – Preferred dividend

                               = $282,300 - $282,300

                               = $0 (Answer)

(d).

Cumulative and participating to 7% total:

In this case preferred stockholders would get arrear dividends for 2019 and 2020along with the current dividend (total for 3 years) up to 7%. The rest will go to the common stockholders.

Preferred dividend = (Preferred stock × Preferred dividend rate) × 3 years

                                = ($820,000 × 7%) × 3

                                = $172,200(Answer)

Common dividend = Total dividend – Preferred dividend

                               = $282,300 - $172200

                               = $110,100 (Answer)

_____________________________________________

If you have any query or any Explanation please ask me in the comment box, i am here to helps you.please give me positive rating.

*****************THANK YOU**************