   Chapter 13, Problem 13.2EX

Chapter
Section
Textbook Problem

Dividends per shareLightfoot Inc., a software development firm, has stock outstanding as follows: 40,000 shares of cumulative preferred 1% stock, $125 par, and 100,000 shares of$150 par common. During its first four years of operations, the following amounts were distributed as dividends: first year, $36,000; second year,$58,000; third year, $75,000; fourth year,$124,000. Compute the dividends per share on each class of stock for each of the four years.

To determine

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

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation. The dividend payments are not guaranteed and are paid after the payment made to the preferred stockholders.

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

A preferred stock may be cumulative and non-cumulative. A cumulative preferred stock implies that a preferred stockholder is entitled to receive dividends for the current year plus any unpaid dividends of the previous years, before the dividends paid to the common stockholders.

Dividend per share:

Dividend per share represents the amount of dividend paid to each shareholders of the business.

To determine: The dividends per share for preferred and common stock for each year.

Explanation

Determine the dividends per share for preferred and common stock for each year.

 Particulars Year 1 Year 2 Year 3 Year 4 Total dividends declared (a) $36,000$58,000 $75,000$124,000 Preferred dividend (For current year) (b) $36,000$44,000 $50,000$50,000 Preferred dividend in arrears (c) $0$14,000 $6,000$0 Total preferred dividends (d) = (b) + (c) $36,000$58,000 $56,000$50,000 Common dividend (e) = (a) − (d) $0$0 $19,000$74,000 Dividend per share: Preferred stock    (Total preferred dividend(d)40,000 preference shares) $0.90$1.45 $1.40$1.25 Common stock   (Common dividend(e)100,000 common shares) $0$0 $0.19$0.74

Table (1)

Working note:

Calculate the amount to be paid as preferred dividend each year

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