Question

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

Common stock (par $1; outstanding, 500,000 shares)	$	500,000
Preferred stock, 8% (par $10; outstanding, 21,000 shares)		210,000
Retained Earnings		900,000

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 $30,000.
Case B:	The preferred stock is cumulative; the total amount of 2018 dividends would be $30,000. Dividends were not in arrears prior to 2016.
Case C:	Same as Case B, except the amount is $75,000.

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.

Answer 1

SOLUTION

1A - Amount of dividends in total payable to each class of stockholders

Case-A

	Calculation	Amount ($)
Total amount of dividend		30,000
Less: Dividend payable to preferred stockholders	21,000*8%*$10	16,800
Dividend payable to Common stockholders		13,200

Since, the preferred stocks are non -cumulative in nature; therefore, the dividends are paid only for the year 2018.

Case-B

	Calculation	Amount ($)
Total amount of dividend		$30,000
Less: Dividend payable to preferred stockholders
For year 2016	21,000*8%*$10	16,800
For year 2017	21,000*8%*$10	16,800
For year 2018	21,000*8%*$10	16,800
Total Dividend payable to preferred stockholders		50,400
Maximum that can be paid to preferred stockholders		30,000
Dividend payable to Common stockholders		0

Stocks which are cumulative in nature, the dividends if not paid for the earlier years, will be accumulated and would be paid whenever the company pays the next dividend.

Case-C

	Calculation	Amount ($)
Total amount of dividend		$75,000
Less: Dividend payable to preferred stockholders
For year 2016	21,000*8%*$10	16,800
For year 2017	21,000*8%*$10	16,800
For year 2018	21,000*8%*$10	16,800
Total Dividend payable to preferred stockholders		50,400
Maximum that can be paid to preferred stockholders		50,400
Dividend payable to Common stockholders		24,600

1B- Amount of dividends per share payable to each class of stockholders

Case -A

	Preferred stockholders	Common stockholders
Amount of dividend (A)	16,800	13,200
Number of shares (B)	21,000	500,000
Dividend per share (A/B)	0.80	0.03

Case -B

	Preferred stockholders	Common stockholders
Amount of dividend (A)	30,000	0
Number of shares (B)	21,000	500,000
Dividend per share (A/B)	1.43	0

Case -C

	Preferred stockholders	Common stockholders
Amount of dividend (A)	50,400	24,600
Number of shares (B)	21,000	500,000
Dividend per share (A/B)	2.40	0.05