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28 September, 03:36

Assuming that the company has retained earnings of "$86,000", all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of stock should receive under each of the following conditions.

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  1. 28 September, 03:56
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    a. preferred stock=$32000, ordinary stock=$54000

    b. preferred stock=$16000, ordinary stock=$70000

    Explanation:

    Lets assume the company has two class of preferred stock, cumulative and non-cumulative. Cumulative preferred stock are shares whose fixed return (i. e fixed dividend) if not paid in one accounting period accumulates with forthcoming years' return and is paid in accumulation whereas non-cumulative preferred stock holders won't be paid for dividends not paid in a year.

    Lets assume, Company has 2000 $100 par value 8% preferred stock and 5100 $50 par value ordinary shares.

    1st case: CPS (Cumulative preferred stock) and OS (Ordinary stock.)

    $86000 of retained earnings will be distributed as follows:

    Preferred Stock dividend each year: 2000*$100*0.08

    PS dividend=$16000 per year

    Now accumulate for 2 years,

    CPS dividend = $16000*2

    CPS dividend = $32000

    After preferred stock holders are paid, the remaining retained earnings are wholly distributed to ordinary stock holders.

    Ordinary stock dividend = $86000 - $32000

    Ordinary stock dividend = $54000.

    2nd case: NCPS (Non-cumulative preferred stock) and OS (Ordinary stock).

    $86000 of retained earnings will be distributed as follows:

    NCPS dividend for the current year only = 2000*$100*0.08

    NCPS dividend for the current year only = $16000

    Now, the remaining is distributed to ordinary stock holders as follows:

    Ordinary stock dividend = $86000 - $16000

    Ordinary stock dividend = $70000
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