Nottebart Corporation has outstanding 10,000 shares of $100 par value, 6% preferred stock and 60,000 shares of $10 par value common stock. The preferred stock was issued in January 2017, and no dividends were declared in 2017 or 2018. In 2019, Nottebart declares a cash dividend of $300,000. How will the dividend be shared by common and preferred stockholders if the preferred is (a) noncumulative and (b) cumulative?

Question

Chubbs

Business

3 July, 22:19

Nottebart Corporation has outstanding 10,000 shares of $100 par value, 6% preferred stock and 60,000 shares of $10 par value common stock. The preferred stock was issued in January 2017, and no dividends were declared in 2017 or 2018. In 2019, Nottebart declares a cash dividend of $300,000. How will the dividend be shared by common and preferred stockholders if the preferred is (a) noncumulative and (b) cumulative?

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Brianna Acosta · Answer 1

(a) noncumulative

Preferred share: $120,000

Common share: $180,000

(b) cumulative

Preferred share: $123,600

Common share: $176,400

Explanation:

Preferred stock outstanding = 10,000 shares * $100 par value = $1,000,000

(a) if the preferred stock interest is noncumulative, the the total dividend paid of 2 years = preferred stock outstanding x rate x 2 years

= $1,000,000 * 6% * 2 = $120,000

Dividend for common stock = total cash dividend - dividend for preferred stock = $300,000 - $120,000 = $180,000

(b) if the preferred stock interest is noncumulative, the the total dividend paid of 2 years = preferred stock outstanding * (1 + rate) ^2 - preferred stock outstanding

= $1,000,000 * (1+6%) ^2 - $1,000,000 = $123,600

Dividend for common stock = $300,000 - $123,600 = $176,400