Question

Ritz Company had the following stock outstanding and Retained Earnings at December 31, 2018:

Common stock (par $1; outstanding, 520,000 shares)	$	520,000
Preferred stock, 8% (par $10; outstanding, 21,200 shares)		212,000
Retained Earnings		902,000

On December 31, 2018, the board of directors is considering the distribution of a cash dividend to the common and preferred stockholders. No dividends were declared during 2016 or 2017. Three independent cases are assumed:

Case A:	The preferred stock is noncumulative; the total amount of 2018 dividends would be $32,000.
Case B:	The preferred stock is cumulative; the total amount of 2018 dividends would be $32,000. Dividends were not in arrears prior to 2016.
Case C:	Same as Case B, except the amount is $77,000.

Required:

1-a. Compute the amount of dividends in total payable to each class of stockholders if dividends were declared as described in each case.

1-b. Compute the amount of dividends per share payable to each class of stockholders if dividends were declared as described in each case.

1A Case A Case B Case C

Preferred

Common

Total

1B Case A Case B Case C

Preferred

Common

Answer 1

	Given Values
	Dividend on Common Stock = $ 32,000
1-a	Computation of the amount of dividend
Case A	Preference stock is non cumulative
	When preference stock is non cumulative the company does not
	need to pay skipped or omitted dividend before paying dividend
	to Common stock holders.In this case Ritz Company will pay
	preference dividend for 2018 only
	Computation of Preference dividend
	Book value Preferred Stock			$212,000
	Rate of Preference dividend			8%
	Preference dividend for 2018
	(Par value of preferred stock * rate
	of dividend)
	$ 212,000 * 8%			$16,960
	Preferred Dividend			$16,960
	Common Dividend			$32,000
	Total			$48,960
Case B	Preference stock is cumulative
	When preference stock is cumulative, the arrears of dividend are
	cumulative and such arrears need to be paid before before
	paying any dividend to common stock holders
	The preference dividend have not been paid since 2016.Hence,
	Ritz Company needs to pay arrears of preference dividend for
	2016,2017 and current year's preference dividend before paying
	dividend to common stock holder.
	Computation of Preference dividend
	Book value Preferred Stock			$212,000
	Rate of Preference dividend			8%
	Annual Preference dividend
	(Par value of preferred stock * rate
	of dividend)
	$ 212,000 * 8%			$16,960
	Preferred Dividend for 2016			$16,960
	Preferred Dividend for 2017			$16,960
	Preferred Dividend for 2018			$16,960
	Cumulative Preferred Dividend			$50,880
	Preferred Dividend			$50,880
	Common Dividend			$32,000
	Total			$82,880
Case C	Given Value
	Common dividend = $ 77,000
	Other details are same as Case B
	When preference stock is cumulative, the arrears of dividend are
	cumulative and such arrears need to be paid before before
	paying any dividend to common stock holders
	The preference dividend have not been paid since 2016.Hence,
	Ritz Company needs to pay arrears of preference dividend for
	2016,2017 and current year's preference dividend before paying
	dividend to common stock holder.
	Computation of Preference dividend
	Book value Preferred Stock			$212,000
	Rate of Preference dividend			8%
	Annual Preference dividend
	(Par value of preferred stock * rate
	of dividend)
	$ 212,000 * 8%			$16,960
	Preferred Dividend for 2016			$16,960
	Preferred Dividend for 2017			$16,960
	Preferred Dividend for 2018			$16,960
	Cumulative Preferred Dividend			$50,880
	Preferred Dividend			$50,880
	Common Dividend			$77,000
	Total			$127,880
1-b	Computation of dividend per share
	Dividend per share = Dividend Paid / No. of shares Outstanding
	No. of Share Outstanding - Common Stock				520,000
	No. of Share Outstanding - Preferred Stock				21,200
		Annual Dividend	Shares Outstanding	Dividend per Share
Case A	Prefferred Stock	$16,960	$21,200	$0.80
	Common Stock	$32,000	$520,000	$0.06
Case B	Total dividend payout for preferred stock includes arrears of
	dividend paid. While computing the dividend per share, we
	will not cosider the arrears amount. Dividend per share for
	Preferred stock would be calculated only on the dividend paid
	for 2018 which is $ 16,960
		Annual Dividend	Shares Outstanding	Dividend per Share
	Prefferred Stock	$16,960	$21,200	$0.80
	Common Stock	$32,000	$520,000	$0.06
Case C	Total dividend payout for preferred stock includes arrears of
	dividend paid. While computing the dividend per share, we
	will not cosider the arrears amount. Dividend per share for
	Preferred stock would be calculated only on the dividend paid
	for 2018 which is $ 16,960
		Annual Dividend	Shares Outstanding	Dividend per Share
	Prefferred Stock	$16,960	$21,200	$0.80
	Common Stock	$77,000	$520,000	$0.15