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In each of the following independent cases, it is assumed that the corporation has outstanding 20,000, $0
In each of the following independent cases, it is assumed that the corporation has outstanding 20,000, $0.80, preferred shares, with a carrying value of $200,000, and 80,000 common shares, with a carrying value of $800,000.
You must show your work. Clearly label your calculations, and clearly label your answer and highlight it with bold print. Correct answers without showing how you arrived at the solution will receive only part marks.
Instructions
- Assume that the preferred dividends are cumulative and non-participating, and preferred dividends are paid up to date through 2019. At December 31, 2020, the board of directors wants to distribute $125,000 in dividends. How much will the preferred shareholders receive? (2 marks)
- Assume that the preferred dividends are cumulative and non-participating. Although dividends have been paid regularly up to 2017, no dividends were declared in 2018 or 2019. At December 31, 2020, the board of directors wants to distribute $200,000 in dividends. How much will the preferred shareholders receive? (3 marks)
- Assume that the preferred dividends are cumulative and fully participating. Although dividends have been paid regularly up to 2017, no dividends were declared in 2018 or 2019. At December 31, 2020, the board of directors wants to distribute $200,000 in dividends. How much will the preferred shareholders receive? (5 marks)
Expert Solution
A.
Preferred Dividend = 20000 x $0.80 = $16000,
Since no preference dividend was in arrears, so preference dividend for current year will be paid.
B.
Dividend for 2018 & 2019 are in arrears, so dividend will be paid for 3 years to preferred shareholders
Preferred Dividend = 20000 x $0.80 x 3 = $48000
C.
| Particulars | Preferred | Common | Total |
| Dividend in arrears | $ 32,000 | $ 32,000 | |
| Current dividends | $ 16,000 | $ 64,000 | $ 80,000 |
| Participating dividend 8.80% | $ 17,600 | $ 70,400 | $ 88,000 |
| Total dividend declared and paid | $ 65,600 | $ 134,400 | $ 200,000 |
First Equivalent Dividend of 8% will be paid to Common shareholders.
Remaining Dividend = $200000 - 32000 - 80000 = $88000
Participating Dividend = $88000 / ($200000+800000) = 8.80%
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