Water Tower Company had the following stock outstanding and Retained Earnings at

Question

Water Tower Company had the following stock outstanding and Retained Earnings at December 31, 2009: On December 31, 2009, the board of directors is considering the distribution of a cash dividend to the common and preferred stockholders. No dividends were declared during 2007 or 2008. Three independent cases are assumed: Case A: The preferred stock is noncumulative; the total amount of 2009 dividends would be $30,000. Case B: The preferred stock is cumulative; the total amount of 2009 dividends would be $12,600. Dividends were not in arrears prior to 2007. Case C: Same as Case B, except the amount is $66,000. Compute the amount of 2009 dividends, in total that would be payable to each class of stockholders for each case. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

Explanation / Answer

Preferred stock dividend = 60,000*.07 = 4,200

Case A: Noncumulative - this means that dividends from 2007 and 2008 are not owed to the preferred shareholders - there are no dividends in arrears.

Preferred gets 4200

common gets the rest, which is 30,000 - 4200 = 25,800

total 30,000

Case B: cumulative - this means dividends from 2007 and 2008 are owed to the preferred shareholders - there are dividends in arrears. For 2007 and 2008, dividends in arrears = 4200 + 4200 = 8400.

Preferred gets 8400 (arrears) + 4200 (this year) = 12,600

Common gets zero (there is nothing left)

total = 12,600

case c:

preferred gets: 12,600 (same as in case B)

Common gets the rest: 66,000 - 12,600 = 53,400

total 66,000

Case A

Case B

Case C

Preferred

4200

12600

12600

Common

25800

0

53400

Total

30000

12600

66000

Case A

Case B

Case C

Preferred

4200

12600

12600

Common

25800

0

53400

Total

30000

12600

66000

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