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Dividends explained in this answer

The Rosewell Co. has had 5,000 shares of 9%, $100 par-value preferred stock and 10,000 shares of $10 par-value common stock for the last two years. During the most recent year , dividends paid totaled $65,000; in the prior year, dividends paid totaled $40,000.

Compute the amount of dividends that must have been paid to preferred stockholders and common stockholders in each year, given the following independent assumptions:

a) Preferred stock is fully participating and cumulative.

b) Preferred stock is nonparticipating and noncumulative.

c) Preferred stock participates up to 10% of its par value and is cumulative.

d) Preferred stock is nonparticipating and cumulative.

Solution Preview

a) Preferred stock is fully participating and cumulative.

Fully participating means that after the common stock holders are also given the same percentage in dividends, the remaining dividend amount will be shared based on the capital contributed between the preferred stock holders and common stock holders. In this case, the preferred stock is 9%, so common stock holders will also get a 9% dividend and then the balance will be shared.
The total dividend to be paid to the preferred stock holders is 5,000X100X9%=$45,000. In the prior year the dividend paid is $40,000. This would all be for preferred stockholders and since the amount should be $45,000 there will be arrears of $5,000 since the stock is cumulative.
In the next year 65,000 is paid. The preferred stock holders will get ...

Solution Summary

The solution explains how to calculate the preferred stock dividends under various conditions.

$2.19