The outstanding stock of Company ABC consists of 3,500 shares of $110 par value,

Question

The outstanding stock of Company ABC consists of 3,500 shares of $110 par value, 6% preferred, and 8,000 shares of $60 par value common.

Assuming that the company has retained earnings of $150,000, 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.

(b) The preferred stock is cumulative and nonparticipating.

(c) The preferred stock is noncumulative and participating.

(d) The preferred stock is cumulative and participating.

Explanation / Answer

a)

preferred stock (3500 x 110 x .06 x 1 year) = 23100

common stock (150000 - 23100) = 126900

b)

preferred stock (3500 x 110 x .06 x 3 years) = 69300

common stock (150000 - 69300) = 80700

c)

preferred stock (3500 x 110 x .06 x 1 year) = 23100

common stock (150000 - 23100) = 126900

d)

preferred stock (3500 x 110 x .06 x 3 years) = 69300

common stock (150000 - 69300) = 80700

Note: Nonparticipating and participating have no effect on the calculations because they only matter during liquidation.

Noncumalative only pays for the current year. Cumulative pays for all years that dividends were not paid up to availabilty of current funds.

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