Chapter 11, Problem 11.4PA

Calculating Common and Preferred Cash Dividends

Ritz Company had the following stock outstanding and Retained Earnings at December 31. 2015:

Common stock (par $1; outstanding, 500,000 shares)	$500,000
Preferred stock, 8% (par $10; outstanding, 21,000 shares)	210,000
Retained earnings	900,000

On December 31, 2015, the board of directors is considering the distribution of a cash dividend to the common and preferred stockholders. No dividends were declared during 2013 or 2014. Three independent cases are assumed:

Case A:	The preferred stock is noncumulative; the total amount of 2015 dividends would be $30,000.
Case B:	The preferred stock is cumulative; the total amount of 2015 dividends would be $30,000. Dividends were not in arrears prior to 2013.
Case C:	Same as Case B, except the amount is $75,000.

Required:

Compute the amount of dividends, in total and per share, payable to each class of stockholders if dividends were declared as described in each case. Show computations. Round per-share amounts to two decimal places.

To determine

The total amount of cash dividend and dividend per share for each of given cases at December 31, 2015.

Explanation of Solution

Cash dividends:

The amount of cash provided by a corporation out of its distributable profits to its stockholders as a return for the amount invested by them is referred as cash dividends.

The total amount of cash dividend and dividend per share for each of given cases at December 31, 2015 are as follows:

Case A: Preferred stock is noncumulative and total amount of dividend is $30,000:

Particulars	Preferred (21,000 shares) $	Common (500,000 shares) .$	Total
Preferred (1)	16,800	0	16,800
Balance to common (2)	0	13,200	13,200
Total	16,800	$13,200	30,000
Dividends per share	$0.80 (3)	$0.26 (4)

Table (1)

Working note:

Calculate the value of preferred stock dividends:

Here,

Total preferred stock is $210,000

Dividend percentage is 8%

$\begin{array}{c}\text{Preferred stock dividends = Total preferred stock }\times \text{ Dividend percentage}\\ \text{=\$210,000}\times \frac{8}{100}\\ =\$16,800\end{array}$ (1)

Calculate the value of common stock dividends:

Here,

Total dividends (given) is $30,000

Dividend for preferred stockholders (1) is $16,800

$\begin{array}{c}\text{Common stock dividends = }\left(\begin{array}{l}\text{Total value of dividends}-\\ \text{Dividend for preferred stockholders}\end{array}\right)\\ \text{=\$30,000}-\$16,800\\ =\$13,200\end{array}$ (2)

Calculate the preferred dividend per share:

$\begin{array}{c}\text{Preferred dividend per share = }\frac{\text{Value of preferred stock dividends (1)}}{\text{Number of preferred shares}}\\ =\frac{\$16,800}{21,000\text{ shares}}\\ =\$0.80\end{array}$ (3)

Calculate the common stock dividend per share:

$\begin{array}{c}\text{Common stock dividend per share = }\frac{\text{Value of common stock dividends (1)}}{\text{Number of common shares}}\\ =\frac{\$13,200}{500,000\text{ shares}}\\ =\$0.03\end{array}$ (4)

Case B: Preferred stock is cumulative and total amount of dividends is $30,000:

Particulars	Preferred (21,000 shares) $	Common (500,000 shares $	Total $
Arrears (5)	30,000	0	30,000
Current year	0	0	0
Balance to common	0	0	0
	30,000	0	30,000
Dividends per share	$1.43 (6)	0

Table (2)

Working note:

Calculate the preferred stock dividends arrear for 2 years:

Here,

Total preferred stock is $210,000

Dividend percentage is 8%

Arrear period is 2 years

$\begin{array}{c}\text{Preferred stock dividends (arrears)= }\left(\begin{array}{l}\text{Total preferred stock }\times \text{ Dividend percentage }\times \\ \text{ Arrear period}\end{array}\right)\\ \text{=\$210,000}\times \frac{8}{100}\times 2\text{years}\\ =\$33,600\end{array}$

$\begin{array}{l}\begin{array}{l}\text{Total amount of divdiends = \$30,000}\\ \text{Calculated dividends = \$33,600}\end{array}\}\text{Whichever is less}\\ \text{Total amount of arrears dividends = \$30,000}\end{array}$ (5)

Note: Calculated dividends should not more than the total amount of dividends.

Calculate the preferred dividend per share:

$\begin{array}{c}\text{Preferred dividend per share = }\frac{\left(\text{Value of preferred stock dividends (arrears) (5)}\right)}{\text{Number of preferred shares}}\\ =\frac{\$30,000}{21,000\text{ shares}}\\ =\$1.43\end{array}$ (6)

Case C: Preferred stock is cumulative and total amount of dividends is $75,000:

Particulars	Preferred (6,000 shares)	Common (30,000 shares)	Total
Arrears (7)	$33,600	0	$33,600
Current year (1)	16,800	0	16,800
Balance to common (8)	0	$24,600	24,600
	$50,400	$24,600	$75,000
Dividends per share	$2.40 (9)	$0.05 (10)

Table (3)

Calculate the preferred stock dividends arrear for 2 years:

Here,

Total preferred stock is $210,000

Dividend percentage is 8%

Arrear period is 2 years

$\begin{array}{c}\text{Preferred stock dividends (arrears)= }\left(\begin{array}{l}\text{Total preferred stock }\times \text{ Dividend percentage }\times \\ \text{ Arrear period}\end{array}\right)\\ \text{=\$210,000}\times \frac{8}{100}\times 2\text{years}\\ =\$33,600\end{array}$ (7)

Calculate the value of common stock dividends:

Here,

Total dividends (given) is $75,000

Dividend for preferred stockholders is $50,400 $\left(\$33,600+\$16,800\right)$

$\begin{array}{c}\text{Common stock dividends = }\left(\begin{array}{l}\text{Total value of dividends}-\\ \text{Dividend for preferred stockholders}\end{array}\right)\\ \text{=\$75,000}-\$50,400\\ =\$24,600\end{array}$ (8)

Calculate the preferred dividend per share:

$\begin{array}{c}\text{Preferred dividend per share = }\frac{\left(\text{Value of preferred stock dividends }\right)}{\text{Number of preferred shares}}\\ =\frac{\$50,400}{21,000\text{ shares}}\\ =\$2.40\end{array}$ (9)

Calculate the common stock dividend per share:

$\begin{array}{c}\text{Common stock dividend per share = }\frac{\text{Value of common stock dividends (8)}}{\text{Number of common shares}}\\ =\frac{\$24,600}{500,000\text{ shares}}\\ =\$0.05\end{array}$ (10)