Brief Exercise 15-15 Nottebart Corporation has outstanding 11,900 shares of $109

Question

Brief Exercise 15-15

Nottebart Corporation has outstanding 11,900 shares of $109 par value, 6% preferred stock and 62,200 shares of $13 par value common stock. The preferred stock was issued in January 2014, and no dividends were declared in 2014 or 2015. In 2016, Nottebart declares a cash dividend of $328,000.

(a) Assume that the preferred are noncumulative. How much dividend will the preferred stockholders receive? How much dividend will the common stockholders receive?

(b) Assume that the preferred are cumulative. How much dividend will the preferred stockholders receive? How much dividend will the common stockholders receive?

Explanation / Answer

Solution:

Total Cash Dividend declared in 2016 = $328,000

(a) Assumed that the preferred stock are non cumulative

Non-cumulative preference shares are the shares which carries the right to get fixed rate of dividend out of the profits of current year only. Non-cumulative preference shares do not carry the right to receive arrears of dividend. It means if a company fails to pay dividend in a particular year then no liabilities are arised in case of non-cumulative preference shares.

Hence company will pay the dividend to Noncumulative Preferred Stock only for the year 2016.

Dividend Payable to Preferred Stock for year 2016 = 11,900 Shares x $109 x 6% = $77,826

Dividend Payable to Common Stockholders for year 2016 = Total Dividend Declared - Preferred Stock Dividend = $328,000 - $77,826 = $250,174

(b) Assumed that the preferred are cumulative

In case of Cumulative Preferred Stock, company is responsible to pay dividend in the future on cumulative preferred stock if not paid in past year or years before paying any dividend to common stockholders.This is a special feature of Cumulative Preference Shares.

Therefore, the company is responsible to pay preferred stock dividend for current year 2016 and past year/years 2015 & 2014 to preferred stockholders before paying any dividend to common stockholders for year 2016.

Hence The total dividend company will pay to preferred shareholders in year 2016 = Dividend for year 2014, 2015 & 2016

= 11,900 Shares x $109 x 6% x 3 = $77,826 x 3 = $233,478

Dividend Payable to Common Stockholders for year 2016 = Total Dividend Declared - Accumulated Preferred Stock Dividend = $328,000 - $233,478 = $94,522

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