Michelangelo Inc., a software development firm, has stock outstanding as follows
ID: 2446025 • Letter: M
Question
Michelangelo Inc., a software development firm, has stock outstanding as follows: 10,000 shares of cumulative 3%, preferred stock of $20 par, and 13,000 shares of $125 par common. During its first four years of operations, the following amounts were distributed as dividends: first year, $2,300; second year, $3,200; third year, $21,990; fourth year, $38,240. Calculate the dividends per share on each class of stock for each of the four years. Round all answers to two decimal places. If no dividends are paid in a given year, enter "0". 1st Year 2nd Year 3rd Year 4th Year Preferred $ $ $ $ Common $ $ $ $ I don't know where to begin or what to do
Explanation / Answer
It is quite easy and simple, preferred stock have fixed dividend and preference over common stockholders for dividend payments. Cumulative preferred stocks are those stocks which if not paid dividend in one year will carry forward in next year.
Below i have calculated it in excel.
Explanation for the calculation is:
Dividend for preferred stock = 3% of 10000 x 20 = $6000 per year.
Since dividends distributed in the first year are less than the preferred dividend proposed the total dividend amount will be paid to the preferred stockholders and the deficit of 6000 - 2300 = $3700 will be carried forward.
Same goes with the second year.
Now, for the third year the deficit accumulated to be paid to the preferred stockholders is 12000 - 2300 - 3700 = $6500. And the dividend to be paid for the third year is $6000 it means a total of $12500 is to be paid to the preferred stockholders and the remaining to the common stockholders.
In the fourth year there is no deficit for the preferred stockholders so they are paid $6000 and the remaining to the common stockholders.
Year Dividend Number of shares Dividend per share Total Preferred Common Preferred Common Preferred Common 1 2300 2300 0 10000 13000 0.23 0 2 3200 3200 0 10000 13000 0.32 0 3 21990 12500 9490 10000 13000 1.25 0.73 4 38240 6000 32240 10000 13000 0.6 2.48