Citicool’s outstanding stock consists of (a) 13,000 shares of noncumulative 8% p
ID: 2377572 • Letter: C
Question
Citicool’s outstanding stock consists of (a) 13,000 shares of noncumulative 8% preferred stock with a $10 par value and (b) 32,500 shares of common stock with a $1 par value. During its first four years of operation, the corporation declared and paid the following cash dividends:2009 . . . . . . . . . . . . . . . . . . . . . . . . $ 8,000
2010 . . . . . . . . . . . . . . . . . . . . . . . . 24,000
2011 . . . . . . . . . . . . . . . . . . . . . . . . 120,000
2012 . . . . . . . . . . . . . . . . . . . . . . . . 197,000
1) Determine the amount of dividends paid each year to each of the two classes of stockholders. Also compute the total dividends paid to each class for the four years combined.
2) Determine the amount of dividends paid each year to each of the two classes of stockholders assuming that the preferred stock is cumulative. Also determine the total dividends paid to each class for the four years combined.
Explanation / Answer
Preferred dividends are paid before common stock dividends are paid. If preferred dividends are cumulative, whatever dividends are not paid one year are rolled over to the following year. The value of preferred stock outstanding is $130,000 (13,000 x $10). The dividend owed each year is $10,400 (130,000 x 8%).
2009 $8,000 Preferred $8,000, Common 0. $2,400 rolled over to the next year.
2010 24,000 Preferred $12,800, Common $11,200
2011 120,000 Preferred $10,400, Common $109,600
2012 197,000 Preferred $10,400, Common $186,600
Preferred: $41,600
Common: $307,400
preferred stock have a defined dividend i.e.: 9% preferred stock with a $10 par value means that it promises to pay $0.90 per share per year in dividends ( 9% of $10 ) so 49,000 shares of 9% preferred stock at $10 par would be $44,100 per year.
In 2009, they declared $35,000 in dividends which is less than what was promised in the 49,000 preferred shares so they paid $0.7143 per share on the preferred shares and are $9,100 in arrears. There is nothing left for the common stock so no dividends are paid to common shares. Most preferred shares carry over the arrears till paid but it is possible for unpaid dividends to just expire in which case they are said to have passed.
In 2010, they declare $37,000 in dividends which is still less then the $44,100 promised to preferred shares so each preferred share receives $0.7551 and they add $7,100 to the $9,100 in arrears carried over from the previous year so they are now $16,200 in arrears.
In 2011, they declared $94,000 in dividends which is more than the $44,100 promised to preferred shares and there's even enough to pay the $16,200 in arrears so they pay a total of $60,300 to the preferred stock which is $1.2306 per share. This leaves $33,700 to be distributed to the common stock which amounts to $0.2751 per share.
In 2012, they declared $144,000 in dividends which is more than the $44,100 promised to preferred stock and they are not in arrears so the preferred stock receives $0.90 per share and the remaining $99,900 gets distributed to the common stock at $0.8155 per share.
Over the four years, $176,400 gets paid out to the 49,000 preferred shares which amounts to $3.60 per share, while $133,600 gets paid out to the 122,500 common shares which amounts to $1.0906 per share.