In 20X7, Snowboard Ltd. had the following share capital outstanding: Preferred s
ID: 2564736 • Letter: I
Question
In 20X7, Snowboard Ltd. had the following share capital outstanding: Preferred shares, no par value, $1.20 dividend: authorized- unlimited shares, issued, 100,000 shares $1,250,000 Common shares, no-par value: Authorized- unlimited shares, issued, 480,000 shares $ 642,000 No dividends were declared in 20X5 or 20X6, but $1,000,000 dividends were declared in 20X7. Required: Calculate the amount of dividends that would be paid in 20X7 to each share class under the following separate cases: Case A- Preferred shares are cumulative and non participating; Case B- Preferred shares are cumulative and participating with common shares only after the common shares receive a $1 per share dividend. Participation is based on relative contributed capital.Explanation / Answer
Calculate the amount of dividend that would be paid in 20X7 to each share class:
Case 1: preferred shares are cumulative and non-participating
1,000,000 dividends are declared but preferred shares are cumulative, hence need to pay the dividends 20X5 and 20X6 along with 20X6
100000*1.2 *3 years = 360,000
Since preferred shares are non-participating, hence the balance left after the preferred dividend is paid to the common stock holders
Common stock holders dividend = Total dividend declared – preferred dividend for 3 yrs.
= 1,000,000-360,000
= $6,400,000
Case 2: If preferred share are cumulative and participating and participate in the profit after the $1 dividend to the common stock
1,000,000 dividends are declared but preferred shares are cumulative, hence need to pay the dividends 20X5 and 20X6 along with 20X6
100000*1.2 *3 years = 360,000
Preferred stock dividend = 3600000
Common stock dividend = 480000*$1 = $480000
Calculate participation in the profit
Profit left after dividend payment = 1,000,000 – 840,000 = 160000
Total shares = preferred + common
=100000+480000=580000
=100000/580000 = 17.24
=480000/580000 = 82.76
Preferred stock participation in the profit = 160000 * 17.24% = 27586.21
Common stock participation in the profit = 160000*82.76% = 132413.8