The outstanding capital stock of Edna Millay Corporation consists of 2,000 share

Question

The outstanding capital stock of Edna Millay Corporation consists of 2,000 shares of $103 par value, 7% preferred, and 5,300 shares of $56 par value common. Assuming that the company has retained earnings of $110,000, 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. (a) The preferred stock is noncumulative and nonparticipating.

Explanation / Answer

(a) Preferred shareholders will be paid dividend for the current years only as the same is noncumulative and nonparticipating.

Dividend to the preferred shareholders = 103 * 2000 * 7% = $14420

Dividend available for the common stakeholders = $110000 - $14420 = $95580

Dividend pay-out on the common stakeholders per share = 95580 / 5300 = $18 or 18/56 * 100 = 32%

(b) If the preferred stock is cumulative, than the dividend paid out to them are for three years.

Dividend to the preferred shareholders = 103 * 2000 * 7% *3 = $43260

Dividend available for the common stakeholders = $110000 - $43260 = $66740

Dividend pay-out on the common stakeholders per share = 66740 / 5300 = $12.60 or 12.60/56 * 100 = 22%

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