Answer:
a. preferred stock=$32000 , ordinary stock=$54000
b. preferred stock=$16000 , ordinary stock=$70000
Explanation:
Lets assume the company has two class of preferred stock, cumulative and non-cumulative. Cumulative preferred stock are shares whose fixed return (i.e fixed dividend) if not paid in one accounting period accumulates with forthcoming years' return and is paid in accumulation whereas non-cumulative preferred stock holders won't be paid for dividends not paid in a year.
Lets assume, Company has 2000 $100 par value 8% preferred stock and 5100 $50 par value ordinary shares.
1st case: CPS (Cumulative preferred stock) and OS (Ordinary stock.)
$86000 of retained earnings will be distributed as follows:
Preferred Stock dividend each year: 2000×$100×0.08
PS dividend=$16000 per year
Now accumulate for 2 years,
CPS dividend = $16000×2
<em>CPS dividend = $32000</em>
After preferred stock holders are paid, the remaining retained earnings are wholly distributed to ordinary stock holders.
Ordinary stock dividend = $86000 - $32000
<em>Ordinary stock dividend = $54000.</em>
2nd case: NCPS (Non-cumulative preferred stock) and OS (Ordinary stock).
$86000 of retained earnings will be distributed as follows:
NCPS dividend for the current year only = 2000×$100×0.08
<em>NCPS dividend for the current year only = $16000</em>
Now, the remaining is distributed to ordinary stock holders as follows:
Ordinary stock dividend = $86000 - $16000
<em>Ordinary stock dividend = $70000 </em>
